e10ksb
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
| |
|
|
| þ |
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2006
OR
| |
|
|
| o |
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 001-13458
SCOTT’S LIQUID GOLD-INC.
(Name of small business as specified in its charter)
| |
|
|
| Colorado
|
|
84-0920811 |
| (State or other jurisdiction of
|
|
(I.R.S. Employer |
| incorporation or organization)
|
|
Identification No.) |
4880 Havana Street
Denver, CO 80239
(Address of principal executive offices and Zip Code)
(303) 373-4860
(Issuer’s telephone number)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: $0.10 Par Value Common Stock
Check whether the Issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the
Exchange Act during the past 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes þ No o
Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B
contained in this form, and no disclosure will be contained, to the best of the registrant’s
knowledge, in definitive proxy or information statements incorporated by reference in Part III of
this Form 10-KSB or any amendments to this Form 10-KSB. þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act.) Yes o No þ
The issuer’s revenues for the fiscal year ended December 31, 2006 were $16,143,600.
The aggregate market value of the common stock held by non-affiliates of the issuer, assuming
directors are affiliates, was $5,556,897 on January 31, 2007.
As of January 31, 2007, there were 10,533,000 shares of common stock, $0.10 par value per share,
outstanding.
The following documents are incorporated by reference: The Registrant’s definitive Proxy Statement
for the Annual Meeting of shareholders scheduled to be held on May 2, 2007, is incorporated by
reference in Part III.
Transitional Small Business Disclosure Format (check one): Yes o No þ
PART I
Item 1. Description of Business
General
Scott’s Liquid Gold-Inc., a Colorado corporation, was incorporated on February 15, 1954.
Through our wholly-owned subsidiaries, we manufacture and market quality household and skin care
products and act as a distributor in the United States of beauty care products contained in
individual sachets and manufactured by Montagne Jeunesse. In this Report, collectively, the terms
“we”, “us” or “our” refers to Scott’s Liquid Gold-Inc. and our subsidiaries. Our business is
comprised of two segments, household products and skin care products.
Our household products consist of (a) Scott’s Liquid Gold® for wood, a wood preservative and
cleaner, sold nationally for over 30 years; (b) a wood wash and wood wipes under the name of
Scott’s Liquid Gold; (c) Scott’s Liquid Gold Mold Control 500, a consumer product that helps rid
homes of mold, introduced in 2006; and (d) Touch of Scent®, an aerosol room air freshener,
distributed nationally since 1982. In early 1992, we entered into the skin care business through
our subsidiary, Neoteric Cosmetics, Inc. Our skin care products consist primarily of Alpha Hydrox®
products, other products manufactured by us, and sachets of Montagne Jeunesse. At the end of 2006,
more than 15 skin care products were being marketed by us, as well as the Montagne Jeunesse
sachets.
For information on our operating segments, please see Note 8, Segment Information, to our
Consolidated Financial Statements.
This report may contain “forward-looking statements” within the meaning of U.S. federal
securities laws. These statements are made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. Forward-looking statements and our performance
inherently involve risks and uncertainties that could cause actual results to differ materially
from the forward-looking statements. Factors that would cause or contribute to such differences
include, but are not limited to, continued acceptance of each of our significant products in the
marketplace; the degree of success of any new product or product line introduction by us;
uncertainty of consumer acceptance of the new Alpha Hydrox products introduced in 2005, and Mold
Control 500 and wood wash products; competitive factors; any decrease in distribution of (i.e.,
retail stores carrying) our significant products; continuation of our distributorship agreement
with Montagne Jeunesse; the need for effective advertising of our products; limited resources
available for such advertising; new competitive products and/or technological changes; dependence
upon third party vendors and upon sales to major customers; changes in the regulation of our
products, including applicable environmental regulations; the effect of these and other risk
factors on our liquidity; the loss of any executive officer; and other matters discussed in this
Report. We undertake no obligation to revise any forward-looking statements in order to reflect
events or circumstances that may arise after the date of this Report.
Strategy
Our strategy is to manufacture and market high quality consumer products which are distinct
within each category in which we compete. Scott’s Liquid Gold for wood distinguishes itself from
competing products as a wood cleaner and preservative, not simply a polish. Mold Control 500 is
based on technology developed and patented by a national laboratory. Touch of Scent is different
from most competing aerosol air fresheners in that it need not be shaken before each use and
because it may be activated by an attractive dispenser which may be mounted on any hard, smooth
surface. It is more convenient to use than competing aerosol brands. With respect to the our line
of skin care products, Alpha Hydrox was one of the first alpha hydroxy acid skin care products sold
to retailers for resale to the public at affordable prices. In 1998, we added a
1
retinol product to our skin care line. In the first half of 1999, we introduced Neoteric Diabetic
Skin Care®. In 2000, we introduced Alpha Hydrox Fade Cream as well as certain other skin care
products which were subsequently discontinued. In 2001, we introduced a topical analgesic called
RubOut™. Since 2001, we have sold Montagne Jeunesse sachets which are reasonably priced and
designed for single use by the consumer. We will continue to examine other possible new products
which we believe may fit well with our expertise and financial capabilities.
In the last ten years, we operated profitably in 1997 and 2002 and incurred losses in 1998
through 2001, 2003, 2004, 2005, and 2006. In the years 1998 through 2004, we experienced
significant declines in sales of Alpha Hydrox skin care products manufactured by us and, to a
lesser extent, in 2006. In 2006 we experienced a significant decline in sales of our Montagne
Jeunesse line of skin care sachets. We also experienced declines in the sales of our household
products from 1998 through 2005, except for an increase in sales of Scott’s Liquid Gold for wood in
2004. In 2006 we experienced an increase in the sale of our household products due to the
introduction of Mold Control 500. Information regarding reasons for the decline in sales of these
products is stated in Item 6, Management’s Discussion and Analysis or Plan of Operation.
The growth in sales of Alpha Hydrox from 1992 through 1996 caused us to make substantial
investments in property, plant and equipment to handle that growth and the anticipated future
growth of our skin care products. The decline in sales of those products in 1998 through 2004 and
in 2006, as well as declines in sales of household chemical products, has resulted in efforts by us
to maintain or increase sales of the existing products, to introduce new products, and to decrease
our costs of doing business. We introduced new products and engaged in cost-cutting programs
during 2000, 2001, 2002 and 2006. Additionally, we introduced several new Alpha Hydrox products in
2005 and two new Alpha Hydrox products in 2006.
Our goal for 2007 is to resume sales growth and attain profitability. To achieve these goals,
we will continue to work on expansion of the distribution of Montagne Jeunesse products, as well as
of our newer Alpha Hydrox products, increasing sales of Scott’s Liquid Gold for wood and our new
mold remediation product “Mold Control 500” and the introduction of new products. During 2007, we
contemplate the introduction of four new skin care products or items, plus a line of skin care
items under the Neoteric Cosmetics label. Within the household product line we plan to introduce
three to four new products or items including some additions to our Touch of Scent air fragrance
product line. We will also consider the development of new niche products, offer to manufacture
private label products for others, and explore the possibility of joint ventures and other projects
which would utilize our manufacturing or marketing capabilities.
Products
Scott’s Liquid Gold for wood, a wood cleaner and preservative, has been our core product since
our inception. It has been popular throughout the U.S. for over thirty years. Scott’s Liquid Gold
for wood, when applied to wood surfaces such as furniture, paneling, kitchen cabinets, outside
stained doors and decking, penetrates microscopic pores in the surface and lubricates beneath,
restoring moisture and, at the same time, minimizes the appearance of scratches, darkening the wood
slightly. Scott’s Liquid Gold preserves wood’s natural complexion and beauty without wax. In May
2004, we commenced the introduction of an additional wood care product in a wipe form; however,
sales have been minimal so far. In the second quarter of 2005 we introduced a wood wash product
under the Scott’s Liquid Gold product line; however, we have obtained limited distribution so far.
During the second quarter of 2006 we began the introduction of our mold remediation product
“Mold Control 500”. It is too early to determine if this introduction will be successful. Scott’s
Liquid Gold Mold Control 500 is an advanced restoration, remediation
2
and antibacterial disinfectant system designed for consumer use on mildew, fungus, mold and fungal
spores.
In 1982, we added the room air freshener Touch of Scent to our line of household products.
Touch of Scent, available in many fragrances, is intended to be used in conjunction with a
decorative dispenser which can be mounted on any hard surface and into which the consumer inserts
an aerosol refill unit. At a touch, the dispenser propels the fragrance from a refill unit into
the air, masking unpleasant odors and refreshing the air with a pleasant scent. We manufacture the
refill unit. Unlike some competitive aerosol air fresheners, Touch of Scent is extremely dry and,
therefore, leaves practically no residue after use. Touch of Scent sales have not been strong in
recent years. In this regard, see Item 6 below, Management’s Discussion and Analysis or Plan of
Operation.
Household products accounted for 53.1% of our consolidated net sales in 2006 and 34.8% in
2005.
In early 1992, we began to market two skin care products under the trade name of Alpha Hydrox.
Since that time we have made additions to our skin care products, some of which were discontinued.
In 2005, we introduced four new Alpha Hydrox products with refined formulas. At the end of 2006,
our skin care line consisted of over 15 products. Our Alpha Hydrox skin care products are sold
through a wholly-owned subsidiary, Neoteric® Cosmetics, Inc. Except for the Montagne Jeunesse
sachets distributed by us, our skin care products are manufactured by Neoteric Cosmetics. Several
of the Alpha Hydrox products contain alpha hydroxyethanoic acids in low but effective
concentrations. Properly blended with a carrier, alpha hydroxyethanoic acids gently slough off dead
skin cells to promote a healthier, more youthful appearance and diminish fine lines and wrinkles.
Our products with alpha hydroxy acids (“AHAs”) include facial care products, a body lotion and a
foot crème. Our other skin care products do not contain AHAs. These products include Neoteric
Diabetic Skin Care, which is a healing crème and a therapeutic moisturizer developed by us to
address the skin conditions of diabetics, caused by poor blood circulation, and which contains a
patented oxygenated oil technology; an Alpha Hydrox Oxygenated Moisturizer, which is our second
skin care product based on the oxygenated oil technology; a Retinol product containing a patented
Microsponge technology that softens fine lines and wrinkles; an Alpha Hydrox Fade Cream designed to
lighten age spots and skin discoloration caused by sun exposure and other factors; RubOut™, which
is a topical analgesic which helps fade the discoloration of bruises and eases the pain from muscle
sprains and bruises; and a body wash. The Montagne Jeunesse sachets, described more below, do not
contain AHAs.
In April of 2001, we made our first sale of skin care sachets under a distributorship
agreement with Montagne Jeunesse. Our agreement covers sales in the United States. Montagne
Jeunesse is a trading division of Medical Express (UK) Ltd., a company located in England.
Montagne Jeunesse sachet products are currently sold by others in the United Kingdom, Holland,
Italy, Ireland, Canada, Australia, Germany and Austria. Examples of the Montagne Jeunesse products
are a facial scrub, a mud pack, face masks, a cream for foot rubs, and “one night” hair color. A
significant portion of our sales are now generated through the distribution of the Montagne
Jeunesse products and, therefore, are dependent on the agreement under which they are purchased by
us. See “Manufacturing and Suppliers” below.
Our business is seasonal to some extent. Sales of Montagne Jeunesse products have been higher
in the fourth quarter than other quarters because of holiday promotions.
Through our research and development group, we continually consider and evaluate possible new
products to be manufactured or sold by us. Generally these products involve household products or
skin care products.
3
Marketing and Distribution
All of our products are sold nationally, directly and through independent brokers, to mass
marketers, drugstores, supermarkets, and other retail outlets and to wholesale distributors. In
2006, Wal-Mart Stores, Inc. (“Wal-Mart”) accounted for approximately 30% of our sales of household
products (32% of such sales in 2005). With regard to our skin care products, Wal-Mart accounted
for approximately 29% of 2006 sales (28% in 2005), and K-Mart Corporation accounted for
approximately 13% of 2006 sales (17% in 2005). Wal-Mart and K-Mart accounted for approximately 29%
and 9%, respectively, of the combined sales of household products and skin care products in 2006.
No long-term contracts exist between us and Wal-Mart, K-Mart Corporation or any other customer. We
permit returns of our products by our customers, a common industry practice. A recent practice of
retailers has been to return products that have either been discontinued or not sold after a period
of time. We subtract any returns from gross sales in determining our net sales and provide a
reserve for such returns which is netted against accounts receivable and gross sales on our
financial statements.
During the years 2001 through 2004, and again in 2006, we experienced a decrease in the
distribution of the Alpha Hydrox products as a result of slowing sales. In 2005, we introduced
four new items in our Alpha Hydrox line of cosmetics, which resulted in some increased distribution
by selling those products to retail store chains not carrying any of our other Alpha Hydrox
products. If sales of one of our products continue to decline, other retail stores, including
potentially Wal-Mart and K-Mart, may discontinue the product. One of our strategies is to maintain
or increase sales of products through limited television advertising. The level of advertising for
our products is constrained by our size and financial resources. Any significant decrease in the
distribution of Alpha Hydrox or Scott’s Liquid Gold products at retail stores could have a material
adverse effect on our sales and operating results.
Our Scott’s Liquid Gold wood care products, Mold Control 500 product, and Alpha Hydrox
products have been advertised nationally on network television, on cable television, and, at times,
in print media. In the past, we have also used radio advertising in selected areas and may do so
in the future. During 2007, but subject to change, we plan a decrease in advertising expenditures
from 2006. To date, we have not used television advertising for the Montagne Jeunesse products.
We periodically review our advertising plans and may revise planned advertising expenditures based
upon actual sales results and competitive conditions.
To enable consumers to make informed decisions, our containers and promotional materials note
the concentration of alpha hydroxy acid contained in each of our Alpha Hydrox products which
contain such acids. We recommend the use of sunscreen in our written directions contained in every
box of Alpha Hydrox products with such acids. We do not exaggerate benefits to be expected from
the use of our products. We also maintain a 24-hour, toll free telephone number and website for
use by consumers of our products.
Our household (except for the Mold Control 500 product) and skin care products are sold in
Canada and other foreign countries. Please see Note 8, Segment Information, to the Consolidated
Financial Statements for information regarding sales in foreign countries. Currently, foreign
sales are made to distributors who are responsible for the marketing of the products, and we are
paid for these products in United States currency.
4
Manufacturing and Suppliers
We own and operate our manufacturing facilities and equipment. With the exception of the
Montagne Jeunesse sachets, our wood wipes, and our Mold Control 500 product, we manufacture all of
our products, maintaining a high quality standard. We fill and package our Mold Control 500
product at our facilities. For all of our products, we must maintain sufficient inventories to
ship most orders as they are received. Quality control is enforced at all stages of production, as
well as upon the receipt of raw materials from suppliers. Raw materials are purchased from a
number of suppliers and, at the present time, are readily available. Our sole supplier of glycolic
acid, which is the most common type of alpha hydroxy acid used by us in our Alpha Hydrox products,
will be E.I. DuPont commencing later in 2007. Our sole supply for the oxygenated oil used in
Neoteric Diabetic Skin Care products is a French company with which we have a non-exclusive supply
agreement. Relations with this and other suppliers are satisfactory.
Most of our manufacturing operations, including most packaging, are highly automated, and, as
a result, our manufacturing operations are not labor intensive, nor, for the most part, do they
involve extensive training. An addition to our plant facilities, completed in early 1996, greatly
increased our capacity to produce skin care products. We currently operate on a one-shift basis.
Our manufacturing facilities are capable of producing substantially more quantities of our products
without any expansion, and, for that reason, we believe that our physical plant facilities are
adequate for the foreseeable future.
In 2001, we commenced purchases of the skin care sachets from Montagne Jeunesse under a
distributorship agreement covering the United States. On May 4, 2005, our wholly-owned subsidiary,
Neoteric Cosmetics, Inc. (“Neoteric”), entered into a new distribution agreement with Montagne
Jeunesse International Ltd (“Montagne Jeunesse”) covering our distribution of Montagne Jeunesse
products. It replaces a distribution agreement in effect since 2000. In the new agreement,
Montagne Jeunesse appoints Neoteric as its exclusive distributor to market and distribute Montagne
Jeunesse products in the United States of America. The appointment is for a period of 18 months,
commencing May 3, 2005, and continues in force until terminated by either party by giving to the
other party no less than three or six months’ notice in writing of a termination at the end of the
initial term of 18 months or any time after the initial term.
In the agreement, Neoteric agrees, among other things: Not to distribute during the duration
of the agreement and for 36 months thereafter any goods of the same description as and which
compete with the Montagne Jeunesse products; to use its best endeavors to develop, promote and sell
the products in the United States and to expand the sale of the products to all potential
purchasers by all reasonable and proper means; to purchase certain core products; to maintain an
inventory of the products for Neoteric’s own account at a level which is based on three months
agreed forecasted sales for the products throughout the United States; and to submit projections of
product requirements on a rolling six month basis. Montagne Jeunesse undertakes to use all
reasonable endeavors to meet all orders for the products to the extent that such orders do not
exceed the forecast for each type of the products. Both parties agree to suggested targeted sales
for the first five years of the agreement as stated in the agreement. The prices for our purchases
of these products are the published list prices as established by Montagne Jeunesse from time to
time, with three months written notice of any change in the published list prices. No party may
assign or transfer any rights or obligations under the agreement or subcontract the performance of
any obligation.
The agreement may also be terminated for a material breach if the breaching party has failed
to remedy the breach within 30 days after receipt of notice in writing and for certain other
events. Montagne Jeunesse may terminate the agreement (1) if Neoteric changes its organization or
methods of business in a way viewed by Montagne Jeunesse as less effective or (2) if there is a
change in control of Neoteric.
5
The principal and controlling owner of Montagne Jeunesse, Gregory Butcher, owned beneficially,
to the best of our knowledge, during 2005 more than 5% of our outstanding common stock; to the best
of our knowledge, at March 1, 2007, he owned beneficially less than 5.0% of our outstanding common
stock.
On April 4, 2006, we entered into a Product Development, Production and Marketing Agreement
with Modec, Inc., a Colorado corporation. Pursuant to this Agreement, we purchase from Modec a
product for the treatment of mold; we sell this product as Mold Control 500. We will fill and
package the product at our facilities and market the product to retail stores in North America.
The Agreement provides us with a license for this purpose. We are required to use our commercially
reasonable efforts to develop a consumer market for the product in the territory. The initial term
of the Agreement is until December 31, 2007, and is automatically renewable for successive one-year
terms.
In July, 2006, we entered into a Supply Agreement with Keltec Dispensing Systems USA, Inc.,
pursuant to which Keltec manufactures and supplies to us certain plastic components used on our
product containers. The initial term of the Supply Agreement is for a period of 18 months, with a
pricing adjustment possible for the last six months of the term. In addition, the Supply Agreement
may be renewed for an additional twelve months upon mutual consent of the parties provided the
parties agree to renewal pricing based on guidelines in the Supply Agreement. The Supply Agreement
may also be terminated by mutual agreement, upon a material breach of the terms, or upon 30-days
notice by either party during any renewal period.
Competition
Our business is highly competitive in both household and skin care products. The air
freshener, wood care, and mold treatment product categories are dominated by three to five
companies significantly larger than us, each of which produce several products. Irrespective of
the foregoing, we maintain a visible position in the wood care category, but do not have sufficient
information to make an accurate representation as to the market share of our products. Over the
last several years, sales of our air freshener products have fallen off significantly and may
continue to do so in the future. From time to time, to stem the attrition of this product line,
we offer price incentives to our customers.
The skin care category is also highly competitive. Several competitors are significantly
larger than Scott’s Liquid Gold-Inc., and each of these competitors produces several products.
Some of these companies also produce retinol and alpha hydroxy acid products with which Alpha
Hydrox must compete. Because of the number of varied products produced by competitors, we cannot
make an accurate representation as to the market share of our skin care products. Irrespective of
the foregoing, we currently have a national base of distribution for our Alpha Hydrox and other
skin care products.
Conforming to our corporate philosophy, we compete on the basis of quality and distinguishing
characteristics of our products.
Regulation
We are subject to various federal, state and local laws and regulations that pertain to the
type of products we manufacture and sell. Our skin care products containing Alpha Hydroxy Acids
(AHAs) are cosmetics within the definition of the Federal Food Drug and Cosmetic Act (FFDCA). The
FFDCA defines cosmetics as products intended for cleansing, beautifying, promoting attractiveness
or altering the appearance. Our cosmetic products are subject to regulation under the FFDCA and
the Fair Packaging and Labeling Act (FPLA), and the regulations promulgated under these acts. The
relevant laws and regulations are enforced by the U.S. Food and Drug Administration (FDA). Such
laws and regulations govern the ingredients and labeling of cosmetic products and set forth
6
good manufacturing practices for companies to follow. Although FDA regulations require that the
safety of a cosmetic ingredient be substantiated prior to marketing, there is no requirement that a
company submit the results of any testing performed or any other data or information with respect
to any ingredient to the FDA. Prior to marketing our products, we conduct studies to demonstrate
that our Alpha Hydrox products do not irritate the skin or eyes. Consistent with regulations, we
do not submit the results of our studies to the FDA.
In July 1997, because of questions raised earlier by the FDA and as requested by the FDA, the
Cosmetic Ingredient Review Expert Panel(“CIR”) sponsored by the cosmetic industry issued a report
concerning the safety of alpha hydroxy acids. The final report, among other things, concluded that
glycolic acid(the most common type of alpha hydroxy acid that we currently use) is safe for use at
concentrations of up to 10%, with a pH level of no less than 3.5 and when directions for use
includes the daily use of sun protection. In January 2005, the FDA issued a final guidance that
products containing AHA’s alert users that those products may increase skin sensitivity to sun and
possible sunburn and the steps to avoid such consequences. All of our labeling reflects this
guidance.
Since 2003, the FDA’s National Center for Toxicological Research has been investigating the
effect of long term exposure to AHAs. On December 31, 2003, the FDA published a call for data on
certain ingredients in various products, including AHAs that are part of wrinkle remover products.
Manufacturers were asked to submit any data supporting the reclassification of these cosmetic
products as over-the-counter drugs. The study results were due in December 2004; however, these
results have not yet been published. If the FDA should change the regulatory classification of our
AHA products, there would be additional regulatory requirements applicable to our operation. The
financial impact, if any, of additional regulatory requirements cannot be determined at this time.
Our advertising is subject to regulation under the Federal Trade Commission Act and related
regulations, which prohibit false and misleading claims in advertising. Our labeling and
promotional materials are believed to be in full compliance with applicable regulations.
Many chemicals used in consumer products, some of which are used in several of our product
formulations, have come under scrutiny by various state governments and the Congress of the United
States in connection with clean air laws. These chemicals are volatile organic compounds (VOCs)
that are contained in various categories of consumer products. As a result of these VOC
regulations, it has been necessary for us to reformulate some of our products, such as Touch of
Scent, Scott’s Liquid Gold Aerosol and Pourable, to conform to certain limits set by the California
Air Resources Board (CARB), other states and the Environment Protection Agency. Our household
chemical products currently meet the most stringent VOC regulations. CARB has recently approved
changes to California’s consumer product regulations that reduce VOC limits for Scott’s Liquid Gold
pourable formula from 7% to 3%, effective December 31, 2008. This reduced limit is expected to be
finalized in the near future. Therefore, this product is currently undergoing reformulation to
comply with the new limit.
Limitations regarding the VOC content of consumer products by both state and federal agencies
will continue to be a part of regulatory efforts to achieve compliance for ozone at or near ground
level. Under the Clean Air Act Amendments of 1990, the Environmental Protection Agency (EPA)
conducted a study on the contribution of consumer products to ozone problems and published
regulations in 1998 designed to reduce the VOC content of consumer products. Various states, in
addition to California, have enacted or are considering VOC regulations for consumer products. We
are unable to predict how many or which other states might enact legislation regulating the VOC
content of consumer products or what effect such legislation might have on our household products.
A group of twelve northeastern states and the District of Columbia collectively drafted the Ozone
7
Transport Commission (OTC) Model Consumer Products Rule in 2001, which is a model that members may
choose to adopt and which has standards that are substantially the same as the CARB consumer
product VOC regulations. More than a majority of the OTC members have adopted the model rule. In
September 2006, the OTC released a new draft model consumer products rule with an effective date of
January 1, 2009. Scott’s Liquid Gold products would not be affected by the changes in this new
model rule, if states were to adopt the changes. There are also potential regulations in a five
state region covered by the Lake Michigan Air Directors Consortium (LADCO), which released an
interim report detailing possible strategies for reducing VOC emissions. These states include
Illinois, Michigan, Wisconsin, Ohio and Indiana. The Michigan Consumer Products Regulation,
adopted in January of 2007, follow the 2001 OTC Model Rule. Michigan is the only state in the
LADCO group that has promulgated such regulations. The other 4 states have not published any
rulemaking yet.
The regulations concerning VOC content are relevant to our household products, but have not
yet affected our skin care products. It is possible that cosmetic products may be affected in the
future by CARB, based on a consumer and commercial product survey of more then 250 categories that
they conducted in 2005. The survey was based on sales for the year 2003 and was intended to update
their information on consumer product VOC emissions. CARB has indicated that there will be another
comprehensive survey based on 2005 sales; however, we do not know the exact date of that survey.
The data from each study will be used to determine which product categories will be selected for
new or revised regulations for the purpose of further reducing VOC emissions from consumer
products. Any new or revised regulations of CARB could apply to our products and could potentially
require additional reformulation of those products.
Limitations regarding the VOC content of consumer products by both state and federal agencies
have been and will continue to be a part of regulatory efforts to achieve compliance for ozone at
or near ground level. We believe that we have done all that is necessary to satisfy the current
requirements of the Clean Air Act and laws of various state governments. Currently, all of our
products may be sold in all areas of the United States.
Employees
We employ 78 persons (compared to 88 persons at the end of 2005), 39 in plant and production
related functions and 39 in administrative, sales and advertising functions. No contracts exist
between us and any union. We monitor wage and salary rates in the Rocky Mountain area and pursue a
policy of providing competitive compensation to our employees. The compensation of our executive
officers is under the review of the Compensation Committee of our Board of Directors. Fringe
benefits for our employees include a medical and dental plan, life insurance, a 401(k) plan with
matching contributions for lower paid employees (those earning $35,000 or less per annum), an
employee stock ownership (ESOP) plan, and a profit sharing plan. We consider our employee
relations to be satisfactory.
Patents and Trademarks
At present, we own one patent covering an ingredient used in some of our skin care products.
Additionally, we actively use our registered trademarks for Scott’s Liquid Gold, Liquid Gold, Touch
of Scent, Alpha Hydrox, TriOxygenC®, and Neoteric in the United States and have
registered trademarks in a number of additional countries. Our registered trademarks and pending
trademark applications concern names and logos relating to our products as well as the design of
boxes for certain of our products.
In December 2000 (amended October 1, 2003), we entered into a license agreement with TriStrata
Technology, Inc. which owns patents dealing with the use of alpha hydroxy acids for the purpose of
reducing the appearance of wrinkles or fine lines. Under the license agreement, Neoteric Cosmetics
and its affiliates have been granted a non-
8
exclusive license for the life of the patents to make and sell skin care products using alpha
hydroxy acids for, among other things, the reduction of the appearance of skin wrinkles and the
reduction in the appearance of skin changes associated with aging. The license agreement covers a
territory which includes the United States and certain foreign countries. In accordance with the
license agreement, Neoteric Cosmetics pays a royalty on net sales of products covered by the
agreement. This license agreement was part of the settlement of a lawsuit brought by TriStrata
Technology against us and others alleging infringement of patents in selling and promoting skin
care products which contain alpha hydroxy acid. By a notice sent to TriStrata Technology, we will
terminate this license agreement in October of 2007 and rely on a license from DuPont for our uses
of alpha hydroxy acids.
Available Information and Code of Ethics
We will make available free of charge through the website
http://www.businesswire.com/cnn/slgd.htm, this annual report, our quarterly reports on Form 10-Q,
our current reports on Form 8-K, and amendments to such reports, as soon as reasonably practicable
after we electronically file or furnish such material with the Securities and Exchange Commission.
These reports are also available through a link on our website. We will provide upon request and
at no charge electronic or paper copies of these filings with the Securities and Exchange
Commission (excluding exhibits).
We will provide to any person without charge, upon request, a copy of the code of business
conduct and ethics which has been adopted by us and which applies to our principal executive
officer, principal financial officer and principal accounting officer, among others.
A request for reports filed with the SEC or the code of business conduct and ethics may be
made to: Corporate Secretary, Scott’s Liquid Gold-Inc., 4880 Havana Street, Denver, Colorado
80239.
Risk Factors
The following is a discussion of certain risks that may affect our business. These risks may
negatively impact our existing business, future business opportunities, our financial condition or
our financial results. In such case, the trading price of our common stock could also decline.
Additional risks and uncertainties not presently known to us, or that we currently see as
immaterial, may also negatively impact our business.
We need to increase our revenues in order to become profitable under our present cost structure.
We have experienced net losses in eight of our last nine years. These losses result primarily
from declining sales of our skin care products and our primary household products. Maintaining or
increasing our revenues is uncertain and involves a number of factors including consumer acceptance
of our products, distribution of our products and other matters described below.
9
Our cash flow is dependent upon operating cash flow.
Because we are dependent on our operating cash flow, any loss of a significant customer, any
further decreases in the distribution of our skin care or household chemical products, new
competitive products affecting sales levels of our products or any significant expense not included
in our internal budget could result in the need to raise cash, such as through additional bank
financing. Except for the existing bank debt, we have no arrangements for an external financing of
debt or equity, and we are not certain whether any such financing would be available on acceptable
terms. In order to improve our operating cash flow, we need to achieve profitability or change
significantly our cost structure.
Sales of our existing products are affected by changing consumer preferences.
Our primary market is retail stores in the United States which sell to consumers or end users
in the mass market. Consumer preferences can change rapidly and are affected by new competitive
products. This situation is true for both skin care and household products and has affected our
established products, most significantly our earlier established Alpha Hydrox products. For
example, in the skin care area, we believe that our products with AHAs are effective in diminishing
fine lines and wrinkles, but consumers may change permanently or temporarily to other products
using other technologies or otherwise viewed as “new.” Any changes in consumer preferences can
affect materially the sales and distribution of our products and thereby our revenues and results
of operation.
In both skin care and household products, we compete every day against the largest consumer product
companies in the United States.
Our large competitors regularly introduce new products and spend multiples of dollars more
than we do on advertising, particularly television advertising. The distribution of our product
and sales can be adversely impacted by the actions of our competitors.
We have limited resources to promote our products with effective advertising.
We sell our products in the consumer retail marketplace. Advertising, particularly television
advertising, is necessary to reach the consumers. Our ability to advertise is affected by our size
and resources. In addition, when we advertise on television, it can significantly increase our
expenses while the effectiveness of any particular advertisement cannot be predicted.
Maintaining or increasing our revenues is dependent on the introduction of new products that are
successful in the marketplace.
Sales of our Alpha Hydrox products, Scott’s Liquid Gold for wood and Touch of Scent have
declined in recent years, except for a small increase in the sale of Scott’s Liquid Gold for wood
in 2004 when we sold the product to additional retail stores. In order to address these declines,
we have introduced new products, including Montagne Jeunesse sachets in 2001, the wood wipe and
wood wash products in 2004 and 2005, our new Alpha Hydrox products in 2005, and our mold
remediation product “Mold Control 500” during the second quarter of 2006. We plan the introduction
of additional products. If we are not successful in making ongoing sales of our newer products to
retail store chains or these products are not well received by consumers, our revenues could be
materially and adversely affected.
10
A loss of one or more of our major customers could have a material adverse effect on our product
sales.
For more than a majority of our sales, we are dependent upon sales to major customers,
including Wal-Mart which is our largest customer. The easy access of consumers to our products is
dependent upon major retail stores and other retail stores carrying our products, particularly mass
merchandisers. The willingness of these customers (i.e., retail stores) to carry any of our
products depends on various matters, including the level of sales of the product at the stores.
Any declines in sales of a product to consumers can result in the loss of retail stores as our
customers and the corresponding decreases in the distribution of the product. It is uncertain
whether the consumer base served by these stores would purchase our products at other retail
outlets. In the past, sales of our products have been affected by retail store chains which
discontinue a product or carry the product in a lesser number of stores.
More than a majority of our sales of skin care product are represented by the Montagne Jeunesse
products which depend upon the continuation of our distributorship agreement with Montagne
Jeunesse.
Our distributorship agreement with Montagne Jeunesse is for a period of 18 months that ended
in November, 2006 and continues in force after this initial term subject to the right of either
party to terminate the agreement with three or six months notice. As a practical matter, we also
believe that the distribution of Montagne Jeunesse sachets is dependent upon our good relationship
with Montagne Jeunesse.
We face the risk that raw materials for our products may not be available or that costs for these
materials will increase, thereby affecting our ability to either manufacture the products or our
gross margin on the products.
We obtain our raw materials from third party suppliers, some of which are sole source
suppliers. While there are two suppliers of glycolic acid, we use one supplier. We have no long
term contracts with our suppliers; and, if a contract exists, it is subject to termination or cost
increases. We may not have sufficient raw materials for production of products manufactured by us
if there is a shortage in raw materials or one of our suppliers terminates our relationship. In
addition, changing suppliers could involve delays that restrict our ability to manufacture or buy
products in a timely manner to meet delivery requirements of our customers. Our suppliers of
products which we distribute can also be subject to the same risk with their vendors.
Our sales are affected adversely by returns.
In our industry, retail stores have the ability to return products. These returns result in
refunds, a reduction of our revenues and usually the need to dispose of the resulting inventory at
discounted prices. Accordingly, level of returns can significantly impact our revenues and cash
flow.
Changes in the regulation of our products, including environmental regulations, could have an
adverse effect on the distribution of our products or the function of our products.
Regulations affecting our products include requirements of the FDA for cosmetic products and
environmental regulations affecting emissions from our products. The FDA has mentioned the
treatment of AHA products as drugs, which could make more expensive or prohibitive our production
and sale of certain Alpha Hydrox products. Also, in the past, we have changed the formulation of
our household products to satisfy environmental regulations and will continue to do so as required.
11
Any adverse developments in litigation could have a material impact on us.
We are subject to lawsuits from time to time in the ordinary course of business. While we
expect those lawsuits not to have a material effect on us, an adverse development in any such
lawsuit or the insurance coverage for a lawsuit could materially and adversely affect our financial
condition and cash flow.
Any loss of our key executives or other personnel could harm our business.
Our success has depended on the experience and continued service of our executive officers and
key employees. If we fail to retain these officers, our ability to continue our business and
effectively compete may be substantially diminished. Because of our size, we must rely in many
departments within our company on one or two managers; the loss of anyone of those could slow our
product development, production of a product, and sale and distribution of a product.
Our stock price can be volatile and can decline substantially.
Our stock is traded on the OTC Bulletin Board. The volume of our stock varies but is
relatively limited. As a result, any events affecting us can result in volatile movements in the
price of our stock and can result in significant declines in the market price of our stock.
Item 2. Description of Property
Our facilities, located in Denver, Colorado, are currently comprised of three connected
buildings and a parking garage (approximately 261,100 square feet in total) and about 16.2 acres of
land, of which approximately 6 acres are available for future expansion. These buildings range in
age from approximately 10 to 35 years (126,600 square feet having been added in 1995 and 1996).
The Denver facility houses our corporate headquarters and all of our operations, and serves as one
of several distribution points. We believe that our current space will provide capacity for growth
for the foreseeable future. All of our land and buildings serve as collateral under a deed of
trust for a $5.2 million bank loan ($5.1 million at December 31, 2006) consummated by us on June
26, 2006.
On March 28, 2006, we also entered into a Lease Agreement with Keltec Dispensing Systems USA,
Inc., a Delaware corporation, pursuant to which we lease to Keltec the space that is located in our
Denver facility and had been used for the operations of the plastics equipment. The lease also
includes the use of certain common areas and equipment. The term of the Lease is three years
beginning July 1, 2006. Keltec may renew the lease for an additional term of three years upon
advance written notice under the same terms and conditions, except that during the renewal term the
rent will be increased by the same percentage as the increase in the CPI-Denver from the
commencement date to the initial expiration date.
Item 3. Legal Proceedings
We
are subject to incidental litigation in the ordinary course of our business. We expect that no pending legal proceeding will have a material adverse effect on us.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
12
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
Market Information
Our $0.10 par value common stock is listed on the NASD OTCBB under the ticker symbol “SLGD”.
The high and low prices of Scott’s Liquid Gold-Inc. common stock as traded on the NASD OTC
Bulletin Board were as follows. The over-the-counter market quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commission and may not necessarily represent
actual transactions.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2006 |
|
2005 |
| |
|
Three Months Ended |
|
Three Months Ended |
| |
|
High |
|
Low |
|
|
|
High |
|
Low |
| |
|
|
March 31 |
|
$ |
1.15 |
|
|
$ |
0.66 |
|
|
March 31 |
|
$ |
0.62 |
|
|
$ |
0.53 |
|
June 30 |
|
$ |
1.01 |
|
|
$ |
0.78 |
|
|
June 30 |
|
$ |
0.59 |
|
|
$ |
0.50 |
|
September 30 |
|
$ |
1.00 |
|
|
$ |
0.80 |
|
|
September 30 |
|
$ |
0.65 |
|
|
$ |
0.54 |
|
December 31 |
|
$ |
0.94 |
|
|
$ |
0.73 |
|
|
December 31 |
|
$ |
1.00 |
|
|
$ |
0.60 |
|
| |
|
|
Shareholders
As of March 1, 2007 we had approximately 1,000 shareholders of record.
Dividends
We did not pay any cash dividends during the two most recent fiscal years. No decision has
been made as to future dividends. See “Management’s Discussion and Analysis or Plan of
Operation — Liquidity and Capital Resources” for information concerning restrictions on
dividends.
Other
Current stock quotes, our SEC filings, quarterly earnings and press releases can be found at:
http://www.businesswire.com/cnn/slgd.htm.
13
Equity Plans
The following table provides, as of December 31, 2006, information regarding our equity
compensation plans, which consist of the 1993, 1997, 1998, and 2005 Stock Option Plans. The 1993
plan expired in January of 2003, and accordingly no shares are available for option under that
plan. We also have an Employee Stock Ownership Plan which invests only in our common stock, but
which is not included in the table below.
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Number of |
| |
|
|
|
|
|
|
|
|
|
securities |
| |
|
|
|
|
|
|
|
|
|
remaining |
| |
|
|
|
|
|
|
|
|
|
available for |
| |
|
Number of |
|
|
|
|
|
future issuance |
| |
|
securities to be |
|
|
|
|
|
under equity |
| |
|
issued upon |
|
Weighted-average |
|
compensation plans |
| |
|
exercise of |
|
exercise price of |
|
(excluding |
| |
|
outstanding |
|
outstanding |
|
securities |
| |
|
options, warrants |
|
options, warrants |
|
reflected in |
| |
|
and rights |
|
and rights |
|
column (a)) |
| Plan Category |
|
(a) |
|
(b) |
|
(c) |
| |
Equity compensation
plans approved by
security holders |
|
|
1,646,100 |
|
|
$ |
.63 |
|
|
|
453,900 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Equity compensation
plans not approved
by security holders |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total |
|
|
1,646,100 |
|
|
$ |
.63 |
|
|
|
453,900 |
|
| |
Stock Purchases
We did not make any repurchases of our outstanding shares during the fourth quarter of
2006.
Pursuant to board resolutions, on November 14, 2006, we issued and contributed 30,000
shares of our common stock to our Employee Stock Ownership Plan (the “Plan”), and purchased 50,000
shares from a former officer at the then market price for contribution to the Plan on February 16,
2006. No consideration was paid by the Plan for these contributions. We believe that these
contributions were not subject to the securities registration requirements of the Securities Act of
1933 because they did not involve a sale. The contributions of the shares to the Plan may also be
exempt from such securities registration as a non-public offering under Section 4(2) of the
Securities Act of 1933.
Item 6. Management’s Discussion & Analysis or Plan of Operation
General
We manufacture and market both household and skin care products. Our products are sold
throughout the United States and Canada and insignificantly in other countries.
14
Critical Accounting Policies
We have identified the policies below as critical to our business operations and the
understanding of our results of operations. These policies involve significant judgments,
estimates and assumptions by our management. For a detailed discussion on the application of these
and other accounting policies, see Note 1 in the Notes to the Consolidated Financial Statements.
Revenue Recognition
Our revenue recognition policy is significant because the amount and timing of revenue
is a key component of our results of operations. We follow the guidance of Staff Accounting
Bulletin No. 104 (“SAB 104”), which requires that a strict series of criteria are met in
order to recognize revenue related to product shipment. If these criteria are not met, the
associated revenue is deferred until the criteria are met. Generally, these criteria are
that there be an arrangement to sell the product, we have delivered the product in accordance
with that arrangement, the sales price is determinable, and collectibility is probable.
Our reserves for accounts receivable consist of a bad debt reserve and reserves for
returns and customer allowances. Reserves for marketing rebates, pricing allowances and
returns, coupons and certain other promotional activities involve estimates made by
management based upon an assessment of historical trends, information from customers, and
anticipated returns and allowances related to current sales activity. The level of returns
and allowances are impacted by, among other things, promotional efforts performed by
customers, changes in customers, changes in the mix of products sold, and the stage of the
relevant product life cycle. Changes in estimates may occur based on actual results and
consideration of other factors that cause returns and allowances. In the event that actual
results differ from these estimates, results of future periods may be impacted.
Reserves for bad debts ($62,000 at December 31, 2006 and December 31, 2005) are recorded
based on estimates by management including factors surrounding the credit risk of specific
customers and historical trends. We have been exposed to potential losses on receivables due
from specific customers that have suffered financial difficulties. We have provided reserves
against certain receivables from such customers in addition to amounts related to
unidentified losses. Those reserves are reduced as those accounts are settled or written
off. In the event that actual losses differ from these estimates or there is an increase in
exposure relating to sales to specific customers, results of future periods may be impacted.
Income Taxes
As of December 31, 2006, we have net deferred income tax assets of $2,046,100 which
primarily relate to net operating loss carryforwards, expenses that are not yet deductible
for tax purposes and tax credit carryforwards, offset by deferred income tax liabilities for
differences in the book and tax bases of property and equipment. The net deferred tax asset
is fully reserved by a valuation allowance. The valuation allowance represents management’s
determination that we will more likely than not be unable to realize the value of such assets
due to the uncertainty of future profitability.
Inventory Valuation and Reserves
Our inventory is a significant component of our total assets. In addition, the carrying
value of such inventory directly impacts the gross margins that we recognize when we sell the
inventory and record adjustments to carrying values. Our inventory is valued at the lower of
cost or market, cost being determined under
15
the first-in, first-out method. We estimate reserves for slow moving and obsolete products
and raw materials based upon historical and anticipated sales. In the event that actual
results differ from these estimates, results of future periods may be impacted.
Recently Issued Accounting Pronouncements
Please see Note 1 (p) of our Consolidated Financial Statements.
Results of Operations
During 2006, we experienced an increase in sales of our household chemical products primarily
because of our introduction of our new mold control product Mold Control 500, while experiencing
decreases in sales of our Montagne Jeunesse line of skin care products and our Alpha Hydrox skin
care products. Our net loss for 2006 was $3,586,600 versus a net loss of $198,100 for 2005. The
loss for 2006 was primarily due to lower sales of the Montagne Jeunesse product line and reduced
sales of our Alpha Hydrox skin care line.
Summary of Results as a Percentage of Net Sales
| |
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, |
| |
|
2006 |
|
2005 |
Net sales |
|
|
|
|
|
|
|
|
Scott’s Liquid Gold household products |
|
|
53.1 |
% |
|
|
34.8 |
% |
Skin care products |
|
|
46.9 |
% |
|
|
65.2 |
% |
| |
|
|
Total net sales |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of sales |
|
|
57.4 |
% |
|
|
56.0 |
% |
| |
|
|
Gross profit |
|
|
42.6 |
% |
|
|
44.0 |
% |
Other revenue |
|
|
1.0 |
% |
|
|
0.2 |
% |
| |
|
|
|
|
|
43.6 |
% |
|
|
44.2 |
% |
| |
|
|
Operating expenses |
|
|
63.8 |
% |
|
|
44.2 |
% |
Interest expense |
|
|
2.0 |
% |
|
|
0.8 |
% |
| |
|
|
|
|
|
65.8 |
% |
|
|
45.0 |
% |
| |
|
|
Loss before income taxes |
|
|
(22.2 |
%) |
|
|
(0.8 |
%) |
| |
|
|
Our gross margins may not be comparable to those of other entities, because some entities
include all of the costs related to their distribution network in cost of sales and others, like
us, exclude a portion of them (freight out to customers and nominal outside warehouse costs) from
gross margin, including them instead in the selling expense line item. See Note 1(o), Operating
Costs and Expenses Classification, to the Consolidated Financial Statements in this Report.
16
Year Ended December 31, 2006
Compared to Year Ended December 31, 2005
Comparative Net Sales
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Percentage |
| |
|
|
|
|
|
|
|
|
|
Increase |
| |
|
2006 |
|
2005 |
|
(Decrease) |
Scott’s Liquid Gold and
other household products |
|
$ |
7,238,700 |
|
|
$ |
6,609,200 |
|
|
|
9.5 |
% |
Touch of Scent |
|
|
1,341,200 |
|
|
|
1,785,900 |
|
|
|
(24.9 |
%) |
| |
|
|
Total household chemical products |
|
|
8,579,900 |
|
|
|
8,395,100 |
|
|
|
2.2 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alpha Hydrox and other skin care |
|
|
3,396,500 |
|
|
|
5,890,000 |
|
|
|
(42.3 |
%) |
Montagne Jeunesse skin care |
|
|
4,167,200 |
|
|
|
9,854,100 |
|
|
|
(57.7 |
%) |
| |
|
|
Total skin care products |
|
|
7,563,700 |
|
|
|
15,744,100 |
|
|
|
(52.0 |
%) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales |
|
$ |
16,143,600 |
|
|
$ |
24,139,200 |
|
|
|
(33.1 |
%) |
| |
|
|
Consolidated net sales for 2006 were $16,143,600 versus $24,139,200 for 2005, a decrease of
$7,995,600 or about (33.1)%. Average selling prices for 2006 were down by $175,200 over those of
the comparable period of 2005, prices of household products being up by $363,600, while average
selling prices of skin care products were down by $538,800. This decrease was primarily due to
price promotions on selected cosmetic products. Co-op advertising, marketing funds, slotting fees
and coupon expenses (promotional allowances) paid to retailers were subtracted from gross sales in
accordance with current accounting policies totaling $2,391,300 in 2006 versus $1,916,600 in 2005,
an increase of $474,700 or about (24.8)%. This increase consisted of an increase in coupon expense
of $431,200, an increase in co-op marketing funds of $154,100 and a decrease in slotting fee
expenses of $110,600.
During 2006, net sales of skin care products accounted for 46.9% of consolidated net sales
compared to 65.2% for 2005. Net sales of these products for those periods were $7,563,700 in 2006
compared to $15,744,100 in 2005, a decrease of $8,180,400 or about (52.0)%. During the first
quarter of 2005 we began introduction of four new items in our Alpha Hydrox line of cosmetic
products. This resulted in “pipeline” orders of the new items in 2005 that were not repeated in
2006. The new items accounted for approximately 43.0% of our sales of Alpha Hydrox and other skin
care sales (which does not include Montagne Jeunesse sales) in 2006 versus 63.7% in 2005. Net sales
of the new Alpha Hydrox products declined in 2006 compared to 2005 as a result of returns from one
retailer in the second quarter, the filling of store shelves with the introduction of the product
in 2005, and higher couponing and co-op advertising costs that are deducted from gross sales. It
is still too early to tell the consumer acceptance of these products which is necessary for
reorders of these products and expanding the distribution of these products.
We have continued to experience a drop in unit sales of our earlier—established alpha hydroxy
acid-based products due primarily to maturing in the market for alpha hydroxy acid-based skin care
products, intense competition from producers of similar or alternative products, many of which are
considerably larger than Neoteric Cosmetics, Inc. and reduced distribution of these products at
retail stores in current and prior periods. For 2006, the sales of our Alpha Hydrox products
accounted for 28.6% of net sales of skin care products and 13.4% of total net sales, compared to
28.9% of net sales of skin care products and 18.8% of total net sales for 2005.
Net sales of Montagne Jeunesse products were $4,167,200 in 2006 versus $9,854,100 for the
comparable period of 2005, a decrease of $5,686,900 or 57.7%. The decrease reflects changes in
product positioning at several key retailers in 2006 as they have revised the amount of shelf and
floor space allocated to these types of products, including the elimination in the first quarter of
2006 at approximately 1,500
Wal-Mart
17
stores of the department in which Montagne Jeunesse products were previously displayed. Because of
orders that we have received in the first quarter of 2007, we anticipate adding back Montagne
Jeunesse sachets into significantly more Wal-Mart stores during the first half of 2007.
Sales of household products for 2006 accounted for 53.1% of consolidated net sales compared to
34.8% for the same period of 2005. These products are comprised primarily of Scott’s Liquid Gold
wood care products (Scott’s Liquid Gold for wood, a wood wash and wood wipes), mold remediation
products and Touch of Scent. Sales of household products were $8,579,900 in 2006, as compared to
sales of $8,395,100 in 2005, an increase of $184,800 or 2.2%. This increase in sales is due to
introduction in the second quarter of 2006 of our mold remediation product “Mold Control 500”,
which is currently sold in some of the stores of national retail chains, with sales of $893,500
during 2006, and although we are encouraged it is still too early to tell if this product will be
successful. Within our Scott’s Liquid Gold wood care products, we experienced an increase in our
sales of our wood wash product because of an increase in distribution, and a decrease in our sales
of both our Scott’s Liquid Gold for wood and our wood wipe product. Although we introduced our
wood wash product in the second quarter of 2005 it is still too early to tell if this product will
be successful. Sales of “Touch of Scent” were down by $444,700 or 24.9%, primarily due to
decreases in distribution in periods prior to the third quarter of 2006.
As sales of a consumer product decline, there is the risk that retailers will stop carrying
the product. The loss of any significant customer for any skin care products, “Scott’s Liquid
Gold” wood care or mold remediation products or “Touch of Scent”, could have a significant adverse
impact on our revenues and operating results. We believe that our future success is highly
dependent on favorable acceptance in the marketplace of Montagne Jeunesse products, of our new
Alpha Hydrox products and of our “Scott’s Liquid Gold” wood care and mold remediation products.
We also believe that the introduction of successful new products, including line extensions of
existing products, such as the wood wash and our new mold remediation product, using the name
“Scott’s Liquid Gold”, are important in our efforts to maintain or grow our revenue. Late in the
fourth quarter of 2006, we introduced two new items within our Alpha Hydrox cosmetic line of
products. We currently plan to introduce four new items to the Alpha Hydrox cosmetic line plus a
line of health and beauty care products under the Neoteric cosmetic label. Within the household
product line we plan to introduce three to four new products or items including some additions to
our Touch of Scent air fragrance product line. To the extent that we manufacture a new product
rather than purchase it from external parties, we are also benefited by the use of existing
capacity in our facilities. We are using our facilities to fill and package the mold control
products. The actual introduction of additional products, the timing of any additional
introductions and any revenues realized from new products is uncertain.
On a consolidated basis, cost of goods sold was $9,270,000 in 2006 compared to $13,514,500 for
2005, a decrease of $4,244,500 (31.4% on a sales decrease of 33.1%). As a percentage of
consolidated net sales for 2006, cost of goods sold was 57.4% compared to 56.0% in 2005, an
increase of 2.5%. This was essentially due to our decrease in plant utilization, resulting from
decreased sales of our Alpha Hydrox cosmetic products during 2006 and the increase in sales
promotion expenses which lowered our revenues and thus affected our margins particularly in the
skin care line of products.
18
Operating Expenses, Interest Expense and Other Income
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Percentage |
| |
|
|
|
|
|
|
|
|
|
Increase |
| |
|
2006 |
|
2005 |
|
(Decrease) |
Operating Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Advertising |
|
$ |
1,558,800 |
|
|
$ |
1,275,200 |
|
|
|
22.2 |
% |
Selling |
|
|
5,516,300 |
|
|
|
5,933,600 |
|
|
|
(7.0 |
%) |
General & Administrative |
|
|
3,228,500 |
|
|
|
3,462,000 |
|
|
|
(6.7 |
%) |
| |
|
|
Total operating expenses |
|
$ |
10,303,600 |
|
|
|
10,670,800 |
|
|
|
(3.4 |
%) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Income and Other |
|
$ |
161,300 |
|
|
$ |
42,300 |
|
|
|
281.3 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense |
|
$ |
315,700 |
|
|
$ |
194,300 |
|
|
|
62.5 |
% |
| |
|
|
Operating expenses, comprised of advertising, selling and general and administrative expenses,
decreased by $367,200 or (3.4)% in 2006, when compared to 2005. The various components of
operating expenses are discussed below. Cost reductions were initiated in the third and fourth
quarters of 2006, including a reduction in the number of employees and salary reductions for
officers and certain employees. These measures will result in a cost savings of approximately
$700,000 on an annualized basis.
Advertising expenses for 2006 were $1,558,800 compared to $1,275,200 for 2005, an increase of
$283,600 or 22.2%. Our increase in advertising was due to our introductory advertising campaign
for our new “Mold Control 500” mold remediation product. In 2007 our initial plans call for less
advertising versus 2006.
Selling expenses for 2006 were $5,516,300 compared to $5,933,600 for 2005, a decrease of
$417,300 or 7.0%. That decrease was comprised of a decrease in freight and brokerage expenses of
$271,500, a decrease in salaries and fringe benefits and related travel expense of $192,200
primarily because of staffing changes in 2006 versus 2005, a decrease in depreciation and royalty
expense of $127,900 offset by an increase in promotional goods and related expenses of $88,400, an
increase in internet and web design costs of $70,000 and by a net increase in other selling
expenses, none of which by itself is significant, of $15,900
General and administrative expenses for 2006 were $3,228,500 compared to $3,462,000 for 2005,
a decrease of $233,500 or 6.7%. Of that decrease $201,000 was primarily attributable to a decrease
in salaries and fringe benefits resulting from a reduction in salaries and personnel, and a net
decrease in other general and administrative expenses of $32,500.
Interest expense for 2006 was $315,700 versus $194,300 for 2005. Interest expense increased
because of higher interest rates and increased borrowing levels. Interest and other income for
2006 was $161,300 which was comprised of $67,100 of gain on sale of assets (that is, the sale of
our plastic molding equipment and related machinery in July 2006 as described in our Form 10-Q
Report for the quarter ended June 30, 2006) and $94,200 of interest income as compared to $42,300
of interest income for 2005. Interest income consists of interest earned on our cash reserves in
2006 and 2005.
During 2006 and 2005, expenditures for research and development were not material (under 2% of
revenues).
19
Liquidity and Capital Resources
On June 28, 2006, we entered into a new loan with a fifteen year amortization with Citywide
Banks for $5,156,600 secured by the land, building and fixtures at our Denver, Colorado facilities.
This loan replaces the bank loan with Citywide Banks, secured by the facilities, in the principal
amount of approximately $1,582,900. Interest on the bank loan (8.0% at December 31, 2006) is at
the prime rate as published in The Wall Street Journal, adjusted annually each June. Part of the
proceeds of the new loan was used to pay off the prior loan, and the remaining proceeds have been
or will be used in business operations, including the development and introduction of new products.
This loan requires 180 monthly payments of approximately $49,500, which commenced on July 28,
2006. As did the prior bank loan, the loan agreement contains a number of covenants, including the
requirement for maintaining a current ratio of at least 1:1 and a ratio of consolidated long-term
debt to consolidated net worth of not more than 1:1. We may not declare any dividends that would
result in a violation of either of these covenants. The foregoing requirements were met at the end
of 2006.
In connection with the new loan, we agreed with Citywide Banks to reduce the amount available
under our line of credit with Citywide Banks from $1,800,000 to $1,300,000. In August of 2006 we
paid off the balance remaining on our line of credit. We chose not to renew the line of credit
when it matured on August 8, 2006.
During 2006, our working capital increased by $891,900, and concomitantly, our current ratio
(current assets divided by current liabilities) increased from 1.6:1 at December 31, 2005 to 2.1:1
at December 31, 2006. This increase in working capital is attributable to an increase in long-term
debt of $3,937,100, depreciation in excess of capital additions and disposals of $565,500, an
increase in common stock and capital in excess of par of $24,600, offset by a net loss in 2006 of
$3,586,600, an increase in other assets of $47,900.
At December 31, 2006, trade accounts receivable were $743,700 versus $1,633,100 at the end of
2005, largely because sales in the quarter ended December 31, 2006 were less than those of the
quarter ended December 31, 2005. Accounts payable increased from the end of 2005 through December
of 2006 by $84,300. At December, 2006 inventories were $106,800 more than at December 31, 2005,
primarily due to an increase in household products inventory, including inventory for our new mold
remediation product, to support sales of these products in the upcoming quarters. Prepaid expenses
decreased from the end of 2005 by $165,300 primarily due to a decrease in prepaid promotional
costs. Accrued payroll and benefits decreased $73,000 from December 31, 2005 to December 31, 2006
primarily because of the timing related to accrued payroll.
We have no significant capital expenditures planned for 2007 and have no current plans for any
external financing, other than our existing bank loan. We expect that our available cash and cash
flows from operating activities will fund the next twelve months of operations.
Our dependence on operating cash flow means that risks involved in our business can
significantly affect our liquidity. Any loss of a significant customer, any further decreases in
distribution of our skin care or household products, any new competitive products affecting sales
levels of our products, or any significant expense not included in our internal budget could result
in the need to raise cash, such as through a bank financing. We have no arrangements for any
additional external financing of debt or equity, and we are not certain whether any such financing
would be available on acceptable terms. In order to improve our operating cash flow, we need to
achieve profitability. Please see “Risk Factors” in Item 1 above.
20
The following table sets forth our contractual obligations in the aggregate. We have no
capital lease obligations, unconditional purchase obligations or other long-term contractual
obligations. Our long-term debt interest rate is a variable rate. The table below assumes an
8.00% annual interest rate for our long-term debt.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| CONTRACTUAL OBLIGATIONS |
| |
|
Payments due by Period |
| |
|
|
|
|
|
Less than |
|
|
|
|
|
|
|
|
|
After |
| |
|
Total |
|
1-Year |
|
1–3 Years |
|
4–5 Years |
|
5 Years |
| |
|
|
Long-term debt, including
interest |
|
$ |
8,636,000 |
|
|
$ |
595,600 |
|
|
$ |
1,191,100 |
|
|
$ |
1,191,100 |
|
|
$ |
5,658,200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee separation agreement |
|
|
7,000 |
|
|
|
7,000 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Operating lease obligations |
|
|
161,300 |
|
|
|
86,100 |
|
|
|
75,200 |
|
|
|
— |
|
|
|
— |
|
| |
Total Contractual Cash Obligations |
|
$ |
8,804,300 |
|
|
$ |
688,700 |
|
|
$ |
1,266,300 |
|
|
$ |
1,191,100 |
|
|
$ |
5,658,200 |
|
| |
21
Item 7. Financial Statements
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Scott’s Liquid Gold-Inc.
We have audited the accompanying consolidated balance sheets of Scott’s Liquid Gold-Inc. and
subsidiaries (the Company) as of December 31, 2006 and 2005, and the related consolidated
statements of operations, shareholders’ equity and comprehensive income (loss), and cash flows for
each of the years ended December 31, 2006 and 2005. These consolidated financial statements are
the responsibility of the Company’s management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of internal control
over financial reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the
Company’s internal control over financial reporting. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Scott’s Liquid Gold-Inc. and subsidiaries as of
December 31, 2006 and 2005, and the results of their operations and their cash flows for each of
the years ended December 31, 2006 and 2005, in conformity with U.S. generally accepted accounting
principles.
/s/ EHRHARDT, KEEFE, STEINER & HOTTMAN P.C.
Denver, Colorado
March 9, 2007
22
Consolidated Statements of Operations
| |
|
|
|
|
|
|
|
|
| |
|
Year ended December 31, |
| |
|
2006 |
|
2005 |
Net sales |
|
$ |
16,143,600 |
|
|
$ |
24,139,200 |
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses: |
|
|
|
|
|
|
|
|
Cost of sales |
|
|
9,270,000 |
|
|
|
13,514,500 |
|
Advertising |
|
|
1,558,800 |
|
|
|
1,275,200 |
|
Selling |
|
|
5,516,300 |
|
|
|
5,933,600 |
|
General and administrative |
|
|
3,228,500 |
|
|
|
3,462,000 |
|
| |
|
|
|
19,573,600 |
|
|
|
24,185,300 |
|
| |
Loss from operations |
|
|
(3,430,000 |
) |
|
|
(46,100 |
) |
Gain on disposal of assets |
|
|
67,100 |
|
|
|
— |
|
Interest income |
|
|
94,200 |
|
|
|
42,300 |
|
Interest expense |
|
|
(315,700 |
) |
|
|
(194,300 |
) |
| |
Loss before income taxes |
|
|
(3,584,400 |
) |
|
|
(198,100 |
) |
Income tax expense (Note 5) |
|
|
(2,200 |
) |
|
|
— |
|
| |
Net loss |
|
$ |
(3,586,600 |
) |
|
$ |
(198,100 |
) |
| |
Net loss per common share (Note 7): |
|
|
|
|
|
|
|
|
Basic |
|
$ |
(0.34 |
) |
|
$ |
(0.02 |
) |
| |
Diluted |
|
$ |
(0.34 |
) |
|
$ |
(0.02 |
) |
| |
Weighted average shares outstanding: |
|
|
|
|
|
|
|
|
Basic |
|
|
10,510,500 |
|
|
|
10,484,600 |
|
| |
Diluted |
|
|
10,510,500 |
|
|
|
10,484,600 |
|
| |
See accompanying notes to consolidated financial statements.
23
Consolidated Balance Sheets
| |
|
|
|
|
|
|
|
|
| |
|
December 31, |
| |
|
2006 |
|
2005 |
| |
ASSETS |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
2,804,100 |
|
|
$ |
2,260,700 |
|
Investment securities |
|
|
51,100 |
|
|
|
51,900 |
|
Trade receivables, net of allowance
of $62,000 for doubtful accounts |
|
|
743,700 |
|
|
|
1,633,100 |
|
Other receivables |
|
|
55,500 |
|
|
|
55,300 |
|
Inventories, net (Note 2) |
|
|
3,291,400 |
|
|
|
3,184,600 |
|
Prepaid expenses |
|
|
161,600 |
|
|
|
326,900 |
|
| |
Total current assets |
|
|
7,107,400 |
|
|
|
7,512,500 |
|
Property, plant and equipment, net (Note 3) |
|
|
13,159,700 |
|
|
|
13,725,200 |
|
Other assets |
|
|
59,700 |
|
|
|
11,800 |
|
| |
|
|
$ |
20,326,800 |
|
|
$ |
21,249,500 |
|
| |
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Line of Credit (Note 4) |
|
$ |
— |
|
|
$ |
570,000 |
|
Accounts payable |
|
|
1,893,600 |
|
|
|
1,809,300 |
|
Accrued payroll and benefits |
|
|
866,400 |
|
|
|
939,400 |
|
Other accrued expenses |
|
|
417,100 |
|
|
|
391,000 |
|
Current maturities of long-term debt (Note 4) |
|
|
191,600 |
|
|
|
956,000 |
|
| |
Total current liabilities |
|
|
3,368,700 |
|
|
|
4,665,700 |
|
Long-term debt,
net of current maturities (Note 4) |
|
|
4,875,500 |
|
|
|
938,400 |
|
| |
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
8,244,200 |
|
|
|
5,604,100 |
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Notes 4, 6, 9 and 10) |
|
|
|
|
|
|
|
|
Shareholders’ equity (Note 6): |
|
|
|
|
|
|
|
|
Common stock; $.10 par value, authorized
50,000,000 shares; issued and outstanding
10,533,000 shares (2006), and
10,503,000 shares (2005) |
|
|
1,053,300 |
|
|
|
1,050,300 |
|
Capital in excess of par |
|
|
5,015,800 |
|
|
|
4,994,200 |
|
Accumulated comprehensive income |
|
|
1,100 |
|
|
|
1,900 |
|
Retained earnings |
|
|
6,012,400 |
|
|
|
9,599,000 |
|
| |
Shareholders’ equity |
|
|
12,082,600 |
|
|
|
15,645,400 |
|
| |
|
|
$ |
20,326,800 |
|
|
$ |
21,249,500 |
|
| |
See accompanying notes to consolidated financial statements.
24
Consolidated Statements of Shareholders’ Equity and Comprehensive Income (Loss)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Capital |
|
|
Accumulated |
|
|
|
|
|
|
|
| Years ended December 31, |
|
Common Stock |
|
|
in Excess |
|
|
Comprehensive |
|
|
Retained |
|
|
Comprehensive |
|
| 2006, 2005 |
|
Shares |
|
|
Amount |
|
|
of Par |
|
|
Income (loss) |
|
|
Earnings |
|
|
Income (loss) |
|
| |
Balance, December 31, 2004 |
|
|
10,471,000 |
|
|
$ |
1,047,100 |
|
|
$ |
4,979,200 |
|
|
$ |
4,200 |
|
|
$ |
9,797,100 |
|
|
|
|
|
Stock purchase
for contribution to
ESOP(Note 6) |
|
|
(70,000 |
) |
|
|
(7,000 |
) |
|
|
(33,600 |
) |
|
|
— |
|
|
|
— |
|
|
|
|
|
Stock issued to ESOP Plan
(Note 6) |
|
|
100,000 |
|
|
|
10,000 |
|
|
|
47,400 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
Stock issued for cash |
|
|
2,000 |
|
|
|
200 |
|
|
|
1,200 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
Unrealized loss on
investment securities |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(2,300 |
) |
|
|
— |
|
|
$ |
(2,300 |
) |
Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(198,100 |
) |
|
|
(198,100 |
) |
| |
Balance, December 31, 2005 |
|
|
10,503,000 |
|
|
|
1,050,300 |
|
|
|
4,994,200 |
|
|
|
1,900 |
|
|
|
9,599,000 |
|
|
|
|
|
Total comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(200,400 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock purchase
for contribution to
ESOP(Note 6) |
|
|
(50,000 |
) |
|
|
(5,000 |
) |
|
|
(43,700 |
) |
|
|
— |
|
|
|
— |
|
|
|
|
|
Stock issued to ESOP Plan
(Note 6) |
|
|
80,000 |
|
|
|
8,000 |
|
|
|
65,300 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
Unrealized loss on
investment securities |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(800 |
) |
|
|
— |
|
|
$ |
(800 |
) |
Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(3,586,600 |
) |
|
|
(3,586,600 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2006 |
|
|
10,533,000 |
|
|
$ |
1,053,300 |
|
|
$ |
5,015,800 |
|
|
$ |
1,100 |
|
|
$ |
6,012,400 |
|
|
|
|
|
| |
|
|
|
|
Total comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(3,587,400 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
25
Consolidated Statements of Cash Flows
| |
|
|
|
|
|
|
|
|
| |
|
Year ended December 31, |
|
| |
|
2006 |
|
|
2005 |
|
Cash Flows from Operating Activities: |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(3,586,600 |
) |
|
$ |
(198,100 |
) |
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net loss
to net cash provided (used) by
operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
650,600 |
|
|
|
670,600 |
|
Stock issued to ESOP |
|
|
73,300 |
|
|
|
57,400 |
|
Gain on sale of assets |
|
|
(67,100 |
) |
|
|
— |
|
Change in assets and liabilities: |
|
|
|
|
|
|
|
|
Trade and other receivables, net |
|
|
889,200 |
|
|
|
(211,800 |
) |
Inventories, net |
|
|
(106,800 |
) |
|
|
(244,300 |
) |
Prepaid expenses and other assets |
|
|
153,600 |
|
|
|
149,300 |
|
Accounts payable and accrued expenses |
|
|
37,400 |
|
|
|
(120,200 |
) |
| |
Total adjustments to net loss |
|
|
1,630,200 |
|
|
|
301,000 |
|
| |
Net Cash Provided (Used) by
Operating Activities |
|
|
(1,956,400 |
) |
|
|
102,900 |
|
| |
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities: |
|
|
|
|
|
|
|
|
Purchase of investment securities |
|
|
— |
|
|
|
(248,400 |
) |
Proceeds from sale or maturity
of investment securities |
|
|
— |
|
|
|
250,000 |
|
Proceeds from sale of equipment |
|
|
93,800 |
|
|
|
2,100 |
|
Purchases of property, plant and equipment |
|
|
(83,300 |
) |
|
|
(25,700 |
) |
| |
Net Cash Provided (Used) by
Investing Activities |
|
|
10,500 |
|
|
|
(22,000 |
) |
| |
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities: |
|
|
|
|
|
|
|
|
Proceeds from long-term borrowings |
|
|
5,156,600 |
|
|
|
— |
|
Principal payments on long-term borrowings |
|
|
(1,983,900 |
) |
|
|
(915,600 |
) |
Loan origination fees and other costs |
|
|
(64,700 |
) |
|
|
— |
|
Proceeds (payments) on
short-term borrowings, net |
|
|
(570,000 |
) |
|
|
(220,000 |
) |
Proceeds from issuance of stock |
|
|
— |
|
|
|
1,400 |
|
Purchase of stock for
contribution to ESOP |
|
|
(48,700 |
) |
|
|
(40,600 |
) |
| |
Net Cash Provided (Used) by
Financing Activities |
|
|
2,489,300 |
|
|
|
(1,174,800 |
) |
| |
Net Increase (Decrease) in Cash and
Cash Equivalents |
|
|
543,400 |
|
|
|
(1,093,900 |
) |
Cash and Cash Equivalents, beginning of year |
|
|
2,260,700 |
|
|
|
3,354,600 |
|
| |
Cash and Cash Equivalents, end of year |
|
$ |
2,804,100 |
|
|
|
2,260,700 |
|
| |
|
|
|
|
|
|
|
|
|
Supplemental disclosures: |
|
|
|
|
|
|
|
|
Cash paid during the year for: |
|
|
|
|
|
|
|
|
Interest |
|
$ |
319,400 |
|
|
$ |
191,200 |
|
Income taxes |
|
$ |
1,100 |
|
|
$ |
1,100 |
|
See accompanying notes to consolidated financial statements.
26
Note 1. Organization and Summary of Significant Accounting Policies
(a) Company Background
Scott’s Liquid Gold-Inc. (a Colorado corporation) was incorporated on February 15, 1954.
Scott’s Liquid Gold-Inc. and its wholly owned subsidiaries (collectively, “we” or “our”)
manufacture and market quality household and skin care products, and we fill, package and market
our Mold Control 500 product. Since the first quarter of 2001, we have acted as a distributor in
the United States of beauty care products contained in individual sachets and manufactured by
Montagne Jeunesse. Our business is comprised of two segments, household products and skin care
products.
(b) Principles of Consolidation
Our consolidated financial statements include our accounts and those of our wholly-owned
subsidiaries. All intercompany accounts and transactions have been eliminated.
(c) Use of Estimates
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those estimates.
Significant estimates include, but are not limited to, realizability of deferred tax assets,
reserves for slow moving and obsolete inventory, customer returns and allowances, coupon
redemptions, and bad debts.
(d) Cash Equivalents
We consider all highly liquid investments with an original maturity of three months or less at
the date of acquisition to be cash equivalents.
(e) Investments in Marketable Securities
We account for investments in marketable securities in accordance with Statement of Financial
Accounting Standards (“SFAS”) No. 115 “Accounting for Certain Investments in Debt and Equity
Securities”, which requires that we classify investments in marketable securities according to
management’s intended use of such investments. We invest our excess cash and have established
guidelines relative to diversification and maturities in an effort to maintain safety and
liquidity. These guidelines are periodically reviewed and modified to take advantage of trends in
yields and interest rates. We consider all investments as available for use in our current
operations and, therefore, classify them as short-term, available-for-sale investments.
Available-for-sale investments are stated at fair value, with unrealized gains and losses, if any,
reported net of tax, as a separate component of shareholders’ equity and comprehensive income
(loss). The cost of the securities sold is based on the specific identification method.
Investments in corporate and government securities as of December 31, 2006, are scheduled to mature
within one year.
(f) Inventories
Inventories consist of raw materials and finished goods and are stated at the lower of cost
(first-in, first-out method) or market. We record a reserve for slow moving and obsolete products
and raw materials. We estimate reserves for slow moving and obsolete products and raw materials
based upon historical and anticipated sales.
Amounts are discussed in Note 2.
27
(g) Property, Plant and Equipment
Property, plant and equipment are recorded at historical cost. Depreciation is provided using
the straight-line method over estimated useful lives of the assets ranging from three to forty-five
years. Building structures and building improvements are estimated to have useful lives of 35 to
45 years and 3 to 20 years, respectively. Production equipment and production support equipment
are estimated to have useful lives of 15 to 20 years and 3 to 10 years, respectively. Office
furniture and office machines are estimated to have useful lives 10 to 20 and 3 to 5 years,
respectively. Carpeting, drapes and company vehicles are estimated to have useful lives of 5 to 10
years. Maintenance and repairs are expensed as incurred. Improvements that extend the useful
lives of the assets or provide improved efficiency are capitalized.
(h) Financial Instruments
Financial instruments which potentially subject us to concentrations of credit risk include
cash and cash equivalents, investments in marketable securities, and trade receivables. We
maintain our cash balances in the form of bank demand deposits with financial institutions that
management believes are creditworthy. As of the balance sheet date and periodically throughout the
year, the Company has maintained balances in various operating accounts in excess of federally
insured limits. We establish an allowance for doubtful accounts based upon factors surrounding the
credit risk of specific customers, historical trends and other information. We have no significant
financial instruments with off-balance sheet risk of accounting loss, such as foreign exchange
contracts, option contracts or other foreign currency hedging arrangements.
The recorded amounts for cash and cash equivalents, receivables, other current assets, and
accounts payable and accrued expenses approximate fair value due to the short-term nature of these
financial instruments. The fair value of investments in marketable securities is based upon quoted
market value. Our long-term debt bears interest at a fixed rate that adjusts annually on the
anniversary date to a then prime rate. The carrying value of long-term debt approximates fair
value as of December 31, 2006 and December 31, 2005.
(i) Long-Lived Assets
We account for long-lived assets in accordance with the provisions of SFAS No. 144,
“Accounting for the Impairment or Disposal of Long-Lived Assets.” This Statement requires that
long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the carrying amount of
an asset to future net cash flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less costs to sell.
(j) Income Taxes
We account for income taxes in accordance with the provisions of SFAS No. 109, “Accounting for
Income Taxes”, which requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences attributable to differences between the financial statement
carrying amounts of assets and liabilities and their respective income tax bases. A valuation
allowance is provided when it is more likely than not that some portion or all of a deferred tax
asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the period in which related temporary differences become
deductible. Deferred tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are expected to be
recovered or settled.
28
(k) Revenue Recognition
Revenue is generally recognized upon delivery of products to customers, which is when title
passes. Reserves for estimated market development support, pricing allowances and returns are
provided in the period of sale as a reduction of revenue. Reserves for returns and allowances are
recorded as a reduction of revenue, and are maintained at a level that management believes is
appropriate to account for amounts applicable to existing sales. Reserves for coupons and certain
other promotional activities are recorded as a reduction of revenue at the later of the date at
which the related revenue is recognized or the date at which the sales incentive is offered. At
December 31, 2006 and December 31, 2005 approximately $649,000 and $794,000, respectively, had been
reserved as a reduction of accounts receivable, and approximately $50,000 and $35,000,
respectively, had been reserved as current liabilities. Co-op advertising, marketing funds,
slotting fees and coupons are deducted from gross sales and totaled $2,391,300, and $1,916,600 in
2006 and 2005, respectively.
(l) Advertising Costs
Advertising costs are expensed as incurred.
(m) Stock-based Compensation
At December 31, 2006, we had four stock-based employee compensation plans. During the first
quarter of fiscal 2006, we adopted the provisions of, and account for stock-based compensation in
accordance with, the Financial Accounting Standards Board’s (“FASB”) Statement of Financial
Accounting Standards No. 123—revised 2004 (“SFAS 123R”), “Share-Based Payment” which replaced
Statement of Financial Accounting Standards No. 123 (“SFAS 123”), “Accounting for Stock-Based
Compensation” and supersedes APB Opinion No. 25 (“APB 25”), “Accounting for Stock Issued to
Employees.” Under the fair value recognition provisions of this statement, stock-based
compensation cost is measured at the grant date based on the fair value of the award and is
recognized as expense on a straight-line basis over the requisite service period, which is the
vesting period. We elected the modified-prospective method, under which prior periods are not
revised for comparative purposes. The valuation provisions of SFAS 123R apply to new grants and to
grants that were outstanding as of the effective date and are subsequently modified. No grants
occurred in 2006 subsequent to the adoption of SFAS 123R and all outstanding options were fully
vested as of December 31, 2005 and December 31, 2006.
Prior to January 1, 2006, we accounted for the plans described above under the recognition and
measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related
Interpretations. No stock-based employee compensation cost is reflected in net income, as all
options granted under those plans had an exercise price not less than the market value of the
underlying common stock on the date of grant. The effect on net income and earnings per share if
we had applied the fair value recognition provisions of FASB Statement No. 123R, Accounting for
Stock-Based Compensation, to stock-based employee compensation was as follows:
| |
|
|
|
|
| |
|
Year Ended |
| |
|
December 31, 2005 |
| |
Net loss, as reported |
|
$ |
(198,100 |
) |
| |
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for all
awards, net of related tax effects (Note 6) |
|
|
(215,400 |
) |
| |
Pro forma net loss |
|
$ |
(413,500 |
) |
| |
|
|
|
|
|
Loss per share: |
|
|
|
|
Basic and diluted — as reported |
|
$ |
(0.02 |
) |
| |
Basic and diluted — pro forma |
|
$ |
(0.04 |
) |
| |
29
(n) Comprehensive Income
We follow SFAS No. 130, “Reporting Comprehensive Income” which establishes standards for
reporting and displaying comprehensive income and its components. Comprehensive income includes all
changes in equity during a period from non-owner sources.
(o) Operating Costs and Expenses Classification
Cost of sales includes costs associated with manufacturing and distribution including labor,
materials, freight-in, purchasing and receiving, quality control, internal transfer costs, repairs,
maintenance and other indirect costs, as well as warehousing and distribution costs. We classify
shipping and handling costs comprised primarily of freight-out and nominal outside warehousing
costs as a component of selling expense on the accompanying Consolidated Statement of Operations.
Shipping and handling costs totaled $1,482,000 and $1,612,000, for the years ended December 31,
2006 and 2005, respectively.
Selling expenses consist primarily of shipping and handling costs, wages and benefits for
sales and sales support personnel, travel, brokerage commissions, promotional costs, as well as
other indirect costs.
General and administrative expenses consist primarily of wages and benefits associated with
management and administrative support departments, business insurance costs, professional fees,
office facility related expenses, and other general support costs.
(p) Recently Issued Accounting Pronouncements
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair
Value Measurements” (“SFAS No. 157”). This Statement defines fair value as used in numerous
accounting pronouncements, establishes a framework for measuring fair value in generally accepted
accounting principles (“GAAP”) and expands disclosure related to the use of fair value measures in
financial statements. SFAS No. 157 does not expand the use of fair value measures in financial
statements, but standardizes its definition and guidance in GAAP. The Standard emphasizes that fair
value is a market-based measurement and not an entity-specific measurement based on an exchange
transaction in which the entity sells an asset or transfers a liability (exit price). SFAS No. 157
establishes a fair value hierarchy from observable market data as the highest level to fair value
based on an entity’s own fair value assumptions as the lowest level. SFAS No. 157 is effective in
fiscal years beginning after November 15, 2007. Adoption of this statement is not expected to
materially impact our results of operations or financial position.
Also in September 2006, the FASB released Statement of Financial Accounting Standards No. 158,
“Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of
FASB Statements No. 87, 88, 106, and 132(R)” (“SFAS No. 158”). Under the new standard, companies
must recognize a net liability or asset to report the funded status of their defined benefit
pension and other postretirement benefit plans on their balance sheets. We do not have such plans
therefore the adoption of the provisions of SFAS 158 did not affect our results of operations or
financial position.
The Financial Accounting Standards Board (FASB) has issued Statements of Financial Accounting
Standards No. 155, “Accounting for Certain Hybrid Financial Instruments-an amendment of FASB
Statements No. 133 and 140” and SFAS No. 156, “Accounting for Servicing
of Financial Assets-an amendment of FASB Statement No. 140” — but they will not have a relationship
to the operations of the Company. Therefore a description and its impact for each on the Company’s
operations and financial position have not been disclosed.
30
In May 2005, the FASB issued Statement of Financial Accounting Standard No. 154, “Accounting
Changes and Error Corrections (SFAS No. 154).” This statement replaces APB Opinion No. 20,
“Accounting Changes”, and FASB Statement No. 3, “Reporting Accounting Changes in Interim Financial
Statements”, and changes the requirements for the accounting for and reporting of a change in
accounting principle. SFAS No. 154 applies to all voluntary changes in accounting principle.
Opinion No. 20 previously required that most voluntary changes in accounting principle be
recognized by including in net income for the period of the change the cumulative effect of
changing to the new accounting principle. SFAS No. 154 requires retrospective application to prior
periods’ financial statements of a change in accounting principle, unless it is impracticable to
determine either the period-specific effects or the cumulative effect of the change. When it is
impracticable to determine the cumulative effect of applying a change in accounting principle to
all prior periods, SFAS No. 154 requires that the new accounting principle be applied as if it were
adopted prospectively from the earliest date practicable. SFAS No. 154 also requires that a change
in depreciation, amortization, or depletion method for long-lived, nonfinancial assets be accounted
for as a change in accounting estimate affected by a change in accounting principle. SFAS No. 154
is effective in fiscal years beginning after December 15, 2005. Adoption of this statement did not
have a material impact on our results of operations or financial position.
In December 2004, the FASB issued Statement of Financial Accounting Standards No. 153,
“Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29” (“SFAS No. 153”). This
Statement amends APB Opinion No. 29 to permit the exchange of nonmonetary assets to be recorded on
a carryover basis when the nonmonetary assets do not have commercial substance. This is an
exception to the basic measurement principle of measuring a nonmonetary asset exchange at fair
value. A nonmonetary asset exchange has commercial substance if the future cash flows of the entity
are expected to change significantly as a result of the exchange. SFAS No. 153 is effective for
nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. We have not
entered into exchanges of nonmonetary assets in the past and do not expect to enter into any
nonmonetary assets exchanges in the foreseeable future; however, if we enter into significant
nonmonetary asset exchanges in the future, SFAS No. 153 could have a material effect on our
consolidated financial position, results of operations or cash flows.
In July 2006, the FASB issued FASB Interpretation No. 48 (FIN 48,) “Accounting for Uncertainty
in Income Taxes, an interpretation of FASB Statement No. 109, Accounting for Income Taxes”. FIN 48
clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax
position is required to meet before being recognized in the financial statements. FIN 48 also
provides guidance on derecognition, measurement, classification, interest and penalties, accounting
in interim periods, disclosure and transition. The interpretation applies to all tax positions
related to income taxes subject to FASB Statement No. 109.
FIN 48 is effective for fiscal years beginning after December 15, 2006. Differences between
amounts recognized in the statements of financial position prior to the adoption of FIN 48 and the
amounts reported after adoption should be accounted for as cumulative-effect adjustment recorded to
the beginning balance of retained earnings. We do not believe that the adoption of FIN 48 will have
a material impact on our financial position.
In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin
(“SAB”) No. 108, which expresses the staff’s views regarding the process of quantifying financial
statement misstatements. SAB No. 108 is effective for fiscal years ending after November 15, 2006.
The adoption of SAB No. 108 had no impact on the Company’s financial position, results of
operations or cash flows.
31
Note 2: Inventories
Inventories, consisting of materials, labor and overhead at December 31 were comprised of the
following:
| |
|
|
|
|
|
|
|
|
| |
|
2006 |
|
2005 |
| |
Finished goods |
|
$ |
2,435,400 |
|
|
$ |
2,149,100 |
|
Raw Materials |
|
|
1,337,200 |
|
|
|
1,344,500 |
|
Inventory reserve for obsolescence |
|
|
(481,200 |
) |
|
|
(309,000 |
) |
| |
|
|
$ |
3,291,400 |
|
|
$ |
3,184,600 |
|
| |
Note 3: Property, Plant and Equipment
Property, plant and equipment at December 31 were comprised of the following:
| |
|
|
|
|
|
|
|
|
| |
|
2006 |
|
2005 |
| |
Land |
|
$ |
1,091,500 |
|
|
$ |
1,091,500 |
|
Buildings |
|
|
16,307,000 |
|
|
|
16,290,000 |
|
Production equipment |
|
|
6,023,000 |
|
|
|
7,535,400 |
|
Office furniture and equipment |
|
|
1,633,600 |
|
|
|
1,875,900 |
|
Other |
|
|
181,200 |
|
|
|
182,000 |
|
| |
|
|
|
25,236,300 |
|
|
|
26,974,800 |
|
Less accumulated depreciation |
|
|
(12,076,600 |
) |
|
|
(13,249,600 |
) |
| |
|
|
$ |
13,159,700 |
|
|
$ |
13,725,200 |
|
| |
Depreciation expense for the years ended December 31, 2006 and 2005, was $622,100 and
$648,000, respectively.
32
Note 4: Debt
We have a term loan agreement in the original amount of $5,156,600 with a commercial bank.
The loan agreement with our bank contains affirmative and negative covenants, including the
requirement for maintaining a current ratio of at least 1:1 and a ratio of consolidated long-term
debt to consolidated net worth of not more than 1:1 and limits the payment of dividends on common
stock.
Long-term debt at December 31 is presented below:
| |
|
|
|
|
|
|
|
|
| |
|
2006 |
|
2005 |
| |
First mortgage loan, secured by land and buildings,
due November 20, 2007, principal and interest of
$88,300 payable monthly, the interest rate is based
on the bank base rate and is adjusted annually in
November. This loan was paid off June 28, 2006 with
Proceeds from a new mortgage loan (see below) |
|
$ |
— |
|
|
$ |
1,894,400 |
|
|
|
|
|
|
|
|
|
|
First mortgage loan, secured by land and buildings
due June 28, 2021, principal and interest of
$49,600 payable monthly, the interest rate is based
on prime rate as published in the Wall Street
Journal and is adjusted annually in June. The
interest rate on this loan at December 31, 2006
was 8.0% |
|
|
5,067,100 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
Less current maturities |
|
|
191,600 |
|
|
|
956,000 |
|
| |
Long-term debt |
|
$ |
4,875,500 |
|
|
$ |
938,400 |
|
| |
Maturities of long-term debt for the years 2007 through 2011 are $191,600, $206,600, $225,200,
$244,100 and $264,700, respectively.
On August 10, 2005 we obtained a $1,800,000 line of credit from a bank to finance additional
inventory and accounts receivable. In connection with the new mortgage loan entered into on June
28, 2006, we agreed with Citywide Banks to reduce the amount available under our line of credit
with Citywide Banks from $1,800,000 to $1,300,000. In August of 2006, we paid off the balance
remaining on our line of credit. We chose not renew the line of credit when it matured on August
8, 2006.
33
Note 5: Income Taxes
The provision for income tax for the years ended December 31 is as follows:
| |
|
|
|
|
|
|
|
|
| |
|
2006 |
|
2005 |
| |
Current provision (benefit): |
|
|
|
|
|
|
|
|
Federal |
|
$ |
— |
|
|
$ |
— |
|
State |
|
|
2,200 |
|
|
|
— |
|
| |
Total current provision (benefit) |
|
|
2,200 |
|
|
|
— |
|
| |
Deferred provision (benefit): |
|
|
|
|
|
|
|
|
Federal |
|
|
(1,234,800 |
) |
|
|
(181,700 |
) |
State |
|
|
(111,700 |
) |
|
|
(14,000 |
) |
Valuation allowance |
|
|
1,346,500 |
|
|
|
195,700 |
|
| |
Total deferred provision (benefit) |
|
|
— |
|
|
|
— |
|
| |
Provision (benefit): |
|
|
|
|
|
|
|
|
Federal |
|
|
— |
|
|
|
— |
|
State |
|
|
2,200 |
|
|
|
— |
|
| |
Total provision (benefit) |
|
$ |
2,200 |
|
|
$ |
— |
|
| |
Income tax expense (benefit) at the statutory tax rate is reconciled to the overall income
tax expense (benefit) as follows:
| |
|
|
|
|
|
|
|
|
| |
|
2006 |
|
2005 |
| |
Federal income tax at statutory rates |
|
$ |
(1,219,400 |
) |
|
$ |
(67,300 |
) |
State income taxes, net of
federal tax effect |
|
|
(109,600 |
) |
|
|
(6,000 |
) |
Other |
|
|
(15,300 |
) |
|
|
(122,400 |
) |
| |
Total |
|
|
(1,344,300 |
) |
|
|
(195,700 |
) |
Change in valuation allowance |
|
|
1,346,500 |
|
|
|
195,700 |
|
| |
Provision for income taxes |
|
$ |
2,200 |
|
|
$ |
— |
|
| |
Deferred income taxes are based on estimated future tax effects of differences between the
carrying amounts of assets and liabilities for financial reporting purposes and the amount used for
income tax purposes given the provision of enacted tax laws. The net deferred tax assets and
liabilities as of December 31, 2006 and 2005 are comprised of the following:
| |
|
|
|
|
|
|
|
|
| |
|
2006 |
|
2005 |
| |
Deferred tax assets: |
|
|
|
|
|
|
|
|
Net operating loss carryforwards |
|
$ |
2,440,300 |
|
|
$ |
1,211,900 |
|
Tax credit and other carryforwards |
|
|
177,600 |
|
|
|
163,400 |
|
Trade receivables |
|
|
23,000 |
|
|
|
23,000 |
|
Inventories |
|
|
154,300 |
|
|
|
103,300 |
|
Accrued vacation |
|
|
252,000 |
|
|
|
268,700 |
|
Accrued payroll |
|
|
2,600 |
|
|
|
3,700 |
|
Other |
|
|
800 |
|
|
|
1,500 |
|
| |
Total deferred tax assets |
|
|
3,050,600 |
|
|
|
1,775,500 |
|
| |
|
|
|
|
|
|
|
|
|
Deferred tax liability: |
|
|
|
|
|
|
|
|
Accelerated depreciation for
tax purposes |
|
|
(1,004,500 |
) |
|
|
(1,075,900 |
) |
| |
Total deferred tax liabilities |
|
|
(1,004,500 |
) |
|
|
(1,075,900 |
) |
| |
Net deferred tax asset, before allowance |
|
|
2,046,100 |
|
|
|
699,600 |
|
Valuation allowance |
|
|
(2,046,100 |
) |
|
|
(699,600 |
) |
| |
Net deferred tax asset |
|
$ |
— |
|
|
$ |
— |
|
| |
34
At December 31, 2006, we had federal net operating loss carryforwards of approximately
$6,000,050 and federal tax credit carryforwards related to research and development efforts of
approximately $177,600, both of which expire over a period ending in 2026. State tax loss
carryforwards at December 31, 2006 are approximately $12,500,000 expiring over a period ending in
2026.
A valuation allowance was established due mainly to the uncertainty relating to the future
utilization of net operating loss carryforwards. The valuation allowance was further increased by
$1,346,500 and $195,700 for 2006 and 2005, respectively, primarily related to uncertainty as to
realization of our operating losses and tax credits for these years. The amount of the deferred
tax assets considered realizable could be adjusted in the future based upon changes in
circumstances that result in a change in our assessment of our ability to realize those deferred
tax assets through the generation of taxable income or other tax events.
35
Note 6: Shareholders’ Equity
In 1993, a non-qualified stock option plan was adopted for the outside directors and in 1997,
an incentive stock option plan was adopted for our employees. The 1993 plan expired in January of
2003, and accordingly no shares are available for option under that plan. In 1998 and 2005, stock
option plans for our employees, officers and directors were adopted. All of the plans permitted
us to grant options up to an aggregate of 2,400,000 shares of common stock. Options are granted at
not less than fair market value of the stock on the date of grant and are exercisable for up to ten
years from the grant date. All options granted through 2006 have been vested on the date of grant.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
1993 Plan |
|
1997 Plan |
|
1998 Plan |
|
2005 Plan |
| |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
| |
|
|
|
|
|
|
Option |
|
|
|
|
|
|
Option |
|
|
|
|
|
|
Option |
|
|
|
|
|
|
Option |
| |
|
Number |
|
|
Price |
|
Number |
|
|
Price |
|
Number |
|
|
Price |
|
Number |
|
|
Price |
| |
|
of |
|
|
Per |
|
of |
|
|
Per |
|
of |
|
|
Per |
|
of |
|
|
Per |
| |
|
Shares |
|
|
Share |
|
Shares |
|
|
Share |
|
|
Shares |
|
|
Share |
|
Shares |
|
|
Share |
| |
Maximum number
of shares
under the plans |
|
|
400,000 |
|
|
|
|
|
|
|
300,000 |
|
|
|
|
|
|
|
1,100,000 |
|
|
|
|
|
|
|
600,000 |
|
|
|
|
|
| |
Outstanding,
December 31, 2004 |
|
|
130,000 |
|
|
$ |
0.65 |
|
|
|
60,000 |
|
|
$ |
0.60 |
|
|
|
925,500 |
|
|
$ |
0.63 |
|
|
|
— |
|
|
$ |
— |
|
Granted in 2005 |
|
|
— |
|
|
|
— |
|
|
|
130,000 |
|
|
|
0.55 |
|
|
|
423,600 |
|
|
|
0.79 |
|
|
|
405,000 |
|
|
|
0.59 |
|
Exercised |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(2,000 |
) |
|
|
0.69 |
|
|
|
— |
|
|
|
— |
|
Cancelled/
Expired |
|
|
(30,000 |
) |
|
|
0.94 |
|
|
|
(10,000 |
) |
|
|
0.97 |
|
|
|
(350,500 |
) |
|
|
0.70 |
|
|
|
(1,000 |
) |
|
|
0.54 |
|
| |
Outstanding,
December 31, 2005 |
|
|
100,000 |
|
|
$ |
0.57 |
|
|
|
180,000 |
|
|
|
0.55 |
|
|
|
996,600 |
|
|
|
0.67 |
|
|
|
404,000 |
|
|
|
0.59 |
|
Granted in 2006 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Exercised |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Cancelled/
Expired |
|
|
— |
|
|
|
— |
|
|
|
(7,000 |
) |
|
|
0.69 |
|
|
|
(16,500 |
) |
|
|
0.84 |
|
|
|
(11,000 |
) |
|
|
0.54 |
|
| |
Outstanding
December 31, 2006 |
|
|
100,000 |
|
|
$ |
0.57 |
|
|
|
173,000 |
|
|
$ |
0.54 |
|
|
|
980,100 |
|
|
$ |
0.67 |
|
|
|
393,000 |
|
|
$ |
0.59 |
|
| |
Available for
issuance,
December 31, 2006 |
|
|
— |
|
|
|
|
|
|
|
127,000 |
|
|
|
|
|
|
|
117,900 |
|
|
|
|
|
|
|
207,000 |
|
|
|
|
|
| |
A summary of additional information related to the options outstanding as of December 31, 2006
is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Options Outstanding and Exercisable |
| |
|
|
|
|
|
Weighted Average |
| |
|
Number |
|
Remaining |
|
Exercise |
| Range of Exercise Prices |
|
Outstanding |
|
Contractual Life |
|
Price |
| |
$0.46—$0.97 |
|
|
1,627,700 |
|
|
2.6 years |
|
$ |
0.63 |
|
$1.06 |
|
|
18,400 |
|
|
3.9 years |
|
$ |
1.06 |
|
| |
Total |
|
|
1,646,100 |
|
|
2.7 years |
|
$ |
0.63 |
|
The weighted average fair value of each option grant has been estimated as of the date of
grant using the Black-Scholes option-pricing model with the following assumptions at December 31.
No options were granted in 2006:
| |
|
|
|
|
| |
|
2005 |
Dividend rate |
|
$ |
— |
|
Expected volatility |
|
|
64 |
% |
Risk-free interest rate |
|
|
4.33 |
% |
Expected life |
|
4.5 years |
36
Using these assumptions, the fair value of the stock options granted in 2005 were estimated to
be approximately $215,400, net of income taxes.
Subsequent to year-end, on February 27, 2007 483,750 five-year options were granted to
Directors, Officers, and employees at $0.82 per share. These options will vest over four years or
upon a change in control.
We have an Employee Stock Ownership Plan (“Plan”) to provide retirement benefits for our
employees. The Plan is designed to invest primarily in our common stock and is non-contributory on
the part of our employees. Contributions to the Plan are discretionary as determined by our Board
of Directors. We expense the cost of contributions to the Plan which amounted to $73,400 (80,000
shares) and $57,400 (100,000 shares), in 2006 and 2005, respectively. In 2006 and 2005, from
authorized and unissued shares, we issued and contributed 30,000 shares of our common stock to the
Plan. Additionally in 2006 and 2005, we purchased 50,000 shares and 70,000 shares, respectively
from a former officer at the then market price for contribution to the Plan.
Note 7: Earnings per Share
We present basic and diluted earnings or loss per share in accordance with SFAS No. 128
“Earnings per Share” which establishes standards for computing and presenting basic and diluted
earnings per share. Per share data is determined by using the weighted average number of common
shares outstanding. Common equivalent shares are considered only for diluted earnings per share,
unless considered anti-dilutive (as in the years 2006 and 2005). Common equivalent shares,
determined using the treasury stock method, result from stock options with exercise prices that are
below the average market price of the common stock. A reconciliation of the weighted average
number of common shares outstanding is as follows:
| |
|
|
|
|
|
|
|
|
| |
|
2006 |
|
2005 |
| |
Common shares outstanding,
beginning of the year |
|
|
10,503,000 |
|
|
|
10,471,000 |
|
Common stock issued |
|
|
— |
|
|
|
— |
|
Stock issued to ESOP |
|
|
30,000 |
|
|
|
30,000 |
|
Stock options exercised |
|
|
— |
|
|
|
2,000 |
|
| |
Common shares outstanding,
end of year |
|
|
10,533,000 |
|
|
|
10,503,000 |
|
| |
Weighted average number of
common shares outstanding |
|
|
10,510,500 |
|
|
|
10,484,600 |
|
Common share equivalents |
|
|
— |
|
|
|
— |
|
| |
Diluted weighted average number
of common shares outstanding |
|
|
10,510,500 |
|
|
|
10,484,600 |
|
| |
We have authorized 20,000,000 shares of preferred stock issuable in one or more series,
none of which is issued or outstanding as of December 31, 2006.
At December 31, 2006, we had 1,646,100 stock options outstanding which have been excluded
from diluted common shares outstanding due to their antidilutive effect.
Note 8: Segment Information
We operate in two different segments: household products and skin care products. Our products
are sold nationally and internationally (primarily Canada), directly and through independent
brokers, to mass merchandisers, drug stores, supermarkets, wholesale distributors and other retail
outlets. Management has chosen to organize our business around these segments based on differences
in the products sold. The household products segment includes “Scott’s Liquid Gold” for wood, a
wood cleaner which preserves as it cleans, Mold Control 500, a mold remediation product, and “Touch
of Scent,” a room air freshener. The skin care segment includes “Alpha Hydrox,” alpha hydroxy acid
cleansers
37
and lotions, a retinol product, and “Diabetic Skin Care”, a healing cream and moisturizer
developed to address skin conditions of diabetics, and beauty care sachets of Montagne Jeunesse
distributed by us.
Accounting policies for our segments are the same as those described in Note 1, “Summary of
Significant Accounting Policies.” Our Management evaluates segment performance based on segment
income or loss before profit sharing, bonuses, income taxes and nonrecurring gains and losses. The
following provides information on our segments as of and for the years ended December 31:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2006 |
|
2005 |
| |
|
Household |
|
Skin Care |
|
Household |
|
Skin Care |
| |
|
Products |
|
Products |
|
Products |
|
Products |
Net sales to
external
customers |
|
$ |
8,579,900 |
|
|
$ |
7,563,700 |
|
|
$ |
8,395,100 |
|
|
$ |
15,744,100 |
|
Loss before profit
sharing, bonuses
and income taxes |
|
$ |
(776,800) |
|
|
$ |
(2,807,600) |
|
|
$ |
(871,400) |
|
|
$ |
673,300 |
|
Identifiable
assets |
|
$ |
3,685,600 |
|
|
$ |
5,185,900 |
|
|
$ |
3,253,500 |
|
|
$ |
6,940,400 |
|
The following is a reconciliation of segment information to consolidated information:
| |
|
|
|
|
|
|
|
|
| |
|
2006 |
|
2005 |
| |
Net sales to external customers |
|
$ |
16,143,600 |
|
|
$ |
24,139,200 |
|
| |
Loss before profit sharing,
bonuses and income taxes |
|
$ |
(3,584,400 |
) |
|
$ |
(198,100 |
) |
| |
Consolidated loss before
income taxes |
|
$ |
(3,584,400 |
) |
|
$ |
(198,100 |
) |
| |
Identifiable assets |
|
$ |
8,871,500 |
|
|
$ |
10,193,900 |
|
Corporate assets |
|
|
11,455,300 |
|
|
|
11,055,600 |
|
| |
Consolidated total assets |
|
$ |
20,326,800 |
|
|
$ |
21,249,500 |
|
| |
We attribute our net sales to different geographic areas based on the location of the
customer. All of our long-lived assets are located in the United States. For the year ended
December 31, revenues for each geographical area are as follows:
| |
|
|
|
|
|
|
|
|
| |
|
2006 |
|
2005 |
| |
United States |
|
$ |
15,916,900 |
|
|
$ |
23,946,300 |
|
Foreign countries |
|
|
226,700 |
|
|
|
192,900 |
|
| |
Total net sales |
|
$ |
16,143,600 |
|
|
$ |
24,139,200 |
|
| |
In 2006 and 2005, one customer accounted for approximately $4,800,000 and $7,000,000,
respectively, of consolidated net sales. Both segments sell to this customer. This customer is not
related to us. The outstanding trade receivable from this same customer accounted for 21.6% and
19.8% of total trade receivables at December 31, 2006 and 2005, respectively. Another customer
accounted for approximately $1,500,000 and $3,200,000 of consolidated net sales in 2006 and 2005
respectively; and, the outstanding trade receivables from this customer accounted for 6.7% and
14.0% of total trade
receivables at December 31, 2006 and 2005, respectively. A loss of these customers could have a
material adverse effect on us because it is uncertain whether our consumer base served by these
customers would purchase our products at other retail outlets. No long-term contracts exist
between us and these customers or any other customer.
38
Note 9: Retirement Plans
We have a 401(k) Profit Sharing Plan (“401(k) Plan”) covering our full-time employees who have
completed four months of service as defined in the 401(k) Plan, and are age 18 or older.
Participants may defer up to 75% of their compensation up to the maximum limit determined by law.
We may make discretionary “matching” contributions up to a maximum of 6% of each participant’s
compensation, but only for those employees earning no more than $35,000 annually. Additionally, we
can make discretionary “profit sharing” contributions to eligible employees. Participants are
always fully vested in their contributions, matching contributions and allocated earnings thereon.
Vesting in our profit sharing contribution is based on years of service, with a participant fully
vested after five years. Our Company matching contributions totaled $7,100 and $11,000, in 2006
and 2005, respectively. We have made no discretionary profit sharing contributions in 2006 and
2005.
Note 10: Commitments and Contingencies
We have entered into various operating lease agreements, primarily for office equipment.
Annual rental expense under these leases totaled $85,900 and $89,800, in 2006 and 2005,
respectively. Minimum annual rental payments under noncancellable operating leases are
approximately $86,100, $62,900, and $12,300, for the years ending December 31, 2007, 2008, and
2009, respectively.
We are subject to incidental litigation in the ordinary course of our business. We expect
that no pending legal proceeding will have a material adverse effect on us.
Note 11. Transactions with Related Parties
In 2001, we commenced purchases of the skin care sachets from Montagne Jeunesse under a
distributorship agreement covering the United States. Montagne Jeunesse is the sole supplier of
that product. Sales of these products represent a significant source of our revenues. On May 4,
2005, our wholly-owned subsidiary, Neoteric Cosmetics, Inc. (“Neoteric”), entered into a new
distribution agreement with Montagne Jeunesse International Ltd (“Montagne Jeunesse”) covering our
distribution of Montagne Jeunesse products. It replaces a distribution agreement in effect since
2000. In the new agreement, Montagne Jeunesse appoints Neoteric as its exclusive distributor to
market and distribute Montagne Jeunesse products in the United States of America. The appointment
is for a period of 18 months, commencing May 3, 2005, and continues in force until terminated by
either party by giving to the other party no less than three months’ notice in writing of a
termination at the end of the initial term of 18 months or any time after the initial term. The
principal and controlling owner of Montagne Jeunesse is the managing director and sole owner of
Atchinson Investments, Ltd., which owned, to our knowledge, in 2005 more than 5% of our outstanding
common stock; to the best of our knowledge, at March 1, 2007, he owned beneficially less than 5.0%
of our outstanding common stock.
We adopted a bonus plan for our executive officers for 2006. The plan provided that an amount
would be distributed to our executive officers equal to 10% of the annual before tax profit
exceeding $1,000,000, excluding items that are infrequent, unusual, or extraordinary. In 2006 and
2005, no bonuses were accrued or paid due to net losses. We have adopted substantially the same
plan for our executive officers in 2007.
39
Note 12. Valuation and Qualifying Accounts (in thousands)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Balance at |
|
Additions |
|
|
|
|
|
Balance |
| |
|
beginning of |
|
charged to |
|
|
|
|
|
at end |
| |
|
year |
|
expense |
|
Deductions |
|
of year |
Year ended December 31, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Returns and allowances, market
development support and
doubtful accounts reserve |
|
$ |
945,600 |
|
|
|
3,387,100 |
|
|
|
3,476,700 |
|
|
$ |
856,000 |
|
Inventory valuation reserve |
|
$ |
309,000 |
|
|
|
16,700 |
|
|
|
16,700 |
|
|
$ |
309,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Returns and allowances, market
development support and
doubtful accounts reserve |
|
$ |
856,000 |
|
|
|
3,457,800 |
|
|
|
3,602,800 |
|
|
$ |
711,000 |
|
Inventory reserve for
obsolescence |
|
$ |
309,000 |
|
|
|
185,000 |
|
|
|
12,900 |
|
|
$ |
481,100 |
|
|
|
|
| Item 8. |
|
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure. |
None.
|
|
|
| Item 8A. |
|
Controls and Procedures. |
As of December 31, 2006, we conducted an evaluation, under the supervision and with the
participation of the Chief Executive Officer and Chief Financial Officer, of the effectiveness of
the design and operation of our disclosure controls and procedures. Based on that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and
procedures are effective to ensure that information required to be disclosed by us in reports that
we file or submit under the Exchange Act is recorded, processed, summarized, and reported within
the time periods specified in Securities and Exchange Commission rules and forms as of December 31,
2006. There was no change in our internal control over financial reporting during the quarter
ended December 31, 2006 that has materially affected, or is reasonably likely to materially affect,
our internal control over financial reporting.
|
|
|
| Item 8B. |
|
Other Information |
None.
PART III
For Part III, except Item 13, Exhibits, the information set forth in our definitive Proxy
Statement for our Annual Meeting of Shareholders to be held in May, 2007, hereby is incorporated by
reference into this Report.
|
|
|
| Item 9. |
|
Directors, Executive Officers, Promoters, Control Persons and Corporate
Governance; Compliance with Section 16(a) of the Exchange Act. |
|
|
|
| Item 10. |
|
Executive Compensation. |
|
|
|
| Item 11. |
|
Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters. |
|
|
|
| Item 12. |
|
Certain Relationships and Related Transactions, and Director Independence. |
40
(c) Exhibits:
| |
|
|
Exhibit
Number |
|
Document |
3.1
|
|
Restated Articles of Incorporation, as amended and restated through
May 1, 1996, incorporated by reference to Exhibit 3.1 of our Annual
Report on Form 10-K for the year ended December 31, 2001. |
|
|
|
3.2
|
|
Bylaws, as amended through February 27, 1996, incorporated by
reference to Exhibit 3.2 of our Annual Report on Form 10-K for the
year ended December 31, 2004. |
|
|
|
4.1
|
|
Change in Terms Agreement with Citywide Banks, dated June 28, 2006,
between us and Citywide Banks, incorporated by reference to Exhibit
10.1 of our Current Report on Form 8-K filed on June 30, 2006. |
|
|
|
4.2
|
|
Business Loan Agreement, dated June 28, 2006, between us and Citywide
Banks, incorporated by reference to Exhibit 10.2 of our Current
Report on Form 8-K filed on June 30, 2006. |
|
|
|
4.3
|
|
Addendum to Loan Documents, dated June 28, 2006, incorporated by
reference to Exhibit 10.3 of our Current Report on Form 8-K filed on
June 30, 2006. |
|
|
|
4.4
|
|
Promissory Note dated June 7, 2006 by us to Citywide Banks; Deed of
Trust dated June 7, 2006 among us, Citywide Banks and the Public
Trustee of the City and County of Denver, Colorado; Assignment of
Rents dated June 7, 2006 between us and Citywide Banks; letter
agreement dated June 7, 2006 regarding the change in the amount under
the existing bank line of credit with Citywide Banks, incorporated by
reference to Exhibit 10.0 of our Current Report on Form 8-K filed on
June 12, 2006. |
|
|
|
10.1*
|
|
Scott’s Liquid Gold-Inc. Health and Accident Plan, Plan Document and
Summary Plan Description Amended and Restated Effective October 1,
2003 incorporated by reference to Exhibit 10.1 of our Annual Report
on Form 10-K for the year ended December 31, 2004. |
|
|
|
10.2
|
|
Scott’s Liquid Gold & Affiliated Companies Employee Benefit Health
And Welfare Plan Amendment #1-2004 incorporated by reference to
Exhibit 10.2 of our Annual Report on Form 10-K for the year ended
December 31, 2004. |
|
|
|
10.3*
|
|
2007 Key Executive Bonus Plan. |
41
| |
|
|
Exhibit
Number |
|
Document |
10.4*
|
|
Indemnification Agreement dated May 6, 1987, between the
Registrant and Mark E. Goldstein, incorporated by reference
to Exhibit 10.4 of our Annual Report on Form 10-K for the
year ended December 31, 2002; Indemnification Agreement
dated December 23, 1991, between the Registrant and Dennis
H. Field, incorporated by reference to Exhibit 10.4 of our
Annual Report on Form 10-K for the year ended December 31,
2002; Amendment to Indemnification Agreement dated January
17, 1992, between the Registrant and Dennis H. Field,
incorporated by reference to Exhibit 10.4 of our Annual
Report on Form 10-K for the year ended December 31, 2002;
Indemnification Agreement, dated July 12, 2000, between us
and Jeffrey R. Hinkle, incorporated by reference to Exhibit
10.4 of our Annual Report on Form 10-K for the year ended
December 31, 2002; Indemnification Agreement, dated August
16, 2000, between us and Carl A. Bellini, incorporated by
reference to Exhibit 10.4 of our Annual Report on Form 10-K
for the year ended December 31, 2002; Indemnification
Agreement, dated November 2, 2000, between us and Jeffry B.
Johnson, incorporated by reference to Exhibit 10.4 of our
Annual Report on Form 10-K for the year ended December 31,
2002; Indemnification Agreement, dated November 20, 2002
between us and Dennis P. Passantino, incorporated by
reference to Exhibit 10.4 of our Annual Report on Form 10-K
for the year ended December 31, 2002; and, Indemnification
Agreement, dated January 26, 2004 between us and Gerald J.
Laber, incorporated by reference to Exhibit 10.4 of our
Annual Report on Form 10-K for the year ended
December 31, 2003. |
|
|
|
10.5
|
|
Agreement dated as of May 3, 2005 between Montagne Jeunesse
International Ltd. and Neoteric Cosmetics, Inc.,
incorporated by reference to Exhibit 10.2 of our Quarterly
Report on Form 10-Q for the quarter ended March 31, 2005. |
|
|
|
10.6*
|
|
Scott’s Liquid Gold-Inc. Employee Stock Ownership Plan and
Trust Agreement, Amended and Restated Effective January 1,
2001, incorporated by reference to Exhibit 10.6 of our
Annual Report on Form 10-K for the year ended December 31,
2001; and Second Amendment to Scott’s Liquid Gold-Inc.
Employee Stock Ownership Plan, effective as of January 1,
2003, incorporated by reference to Exhibit 10.6 of our
annual Report on Form 10-K for the year ended December 31,
2003. |
|
|
|
10.7
|
|
Third Amendment to Scott’s Liquid Gold-Inc. Employee Stock
Ownership Plan, effective March 28, 2005, incorporated by
reference to Exhibit 10.1 of our Quarterly Report on Form
10-Q for the quarter ended
March 31, 2005. |
|
|
|
10.8*
|
|
Scott’s Liquid Gold-Inc. 1993 Stock Option Plan for Outside
Directors, incorporated by reference to Exhibit 4.7 of our
Registration Statement No. 33-63254 on Form S-8, filed with
the Commission on May 25, 1993. |
|
|
|
10.9*
|
|
Scott’s Liquid Gold-Inc. 1998 Stock Option Plan,
incorporated by reference to Exhibit 4.3 of our
Registration Statement No. 333-51710, filed with the
Commission on December 12, 2000. |
|
|
|
10.10*
|
|
Scott’s Liquid Gold-Inc. 2005 Stock Incentive Plan,
incorporated by reference to Exhibit 4.3 of Registration
Statement No. 333-126028 filed with the Commission on June
22, 2005. |
42
| |
|
|
Exhibit
Number |
|
Document |
10.11
|
|
Product Development, Production and Marketing Agreement with Modec,
Inc. dated April 4, 2006, incorporated by reference to Exhibit 10.1 of
our Quarterly Report on Form 10-Q for the quarter ended June 30, 2006. |
|
|
|
10.12
|
|
Form of Lease for Keltec Dispensing Systems USA, Inc., incorporated by
reference to Exhibit 10.1 of our Quarterly Report on Form 10-Q for the
quarter ended March 31, 2006. |
|
|
|
10.13
|
|
Supply Agreement dated as of March 28, 2006 between us and Keltec
Dispensing Systems USA, Inc., incorporated by reference to Exhibit 10.2
of our Quarterly Report on Form 10-Q for the quarter ended
March 31, 2006.** |
|
|
|
10.14
|
|
Second Amendment to September 1, 2000 License Agreement between
Neoteric Cosmetics, Inc. and TriStrata Technology, Inc., incorporated
by reference to Exhibit 10.3 of our Quarterly Report on Form 10-Q for
the quarter ended March 31, 2006.** |
|
|
|
10.15
|
|
License Agreement dated as of September 1, 2000 between TriStrata
Technology, Inc. and Neoteric Cosmetics, Inc., , incorporated by
reference to Exhibit 10.4 of our Quarterly Report on Form 10-Q for the
quarter ended March 31, 2006.** |
|
|
|
21
|
|
List of Subsidiaries. |
|
|
|
23
|
|
Consent of Ehrhardt, Keefe, Steiner & Hottman PC. |
|
|
|
24
|
|
Powers of Attorney. |
|
|
|
31.1
|
|
Rule 13a-14(a) Certification of the Chief Executive Officer. |
|
|
|
31.2
|
|
Rule 13a-14(a) Certification of the Chief Financial Officer. |
|
|
|
32.1
|
|
Section 1350 Certification. |
|
|
|
| * |
|
Management contract or compensatory plan or arrangement |
| |
| ** |
|
This Agreement is currently subject to a Confidential Treatment Request with the Securities and
Exchange Commission. |
|
|
|
| Item 14. |
|
Principal Accountant Fees and Services. |
43
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
| |
|
|
|
|
| |
SCOTT’S LIQUID GOLD-INC.,
a Colorado corporation
|
|
| |
By: |
/s/ Mark E. Goldstein
|
|
| |
|
Mark E. Goldstein, President and Chief |
|
| |
|
Executive Officer
Principal Executive Officer |
|
| |
| |
By: |
/s/ Jeffry B. Johnson
|
|
| |
|
Jeffry B. Johnson, Treasurer and |
|
| |
|
Chief Financial Officer
Principal Financial Officer |
|
| |
| |
By: |
/s/ Brian L. Boberick, Controller
|
|
| |
|
Brian L. Boberick, Controller |
|
| |
|
|
| |
Date: March 14, 2007 |
|
|
| |
In accordance with Exchange Act, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates indicated.
| |
|
|
|
|
|
|
|
|
|
|
| Date |
|
Name and Title |
|
|
|
|
|
Signature |
|
|
March 14, 2007
|
|
Mark E. Goldstein, Director,
|
|
|
) |
|
|
|
|
|
|
|
President and Chief
|
|
|
) |
|
|
|
|
|
|
|
Executive Officer
|
|
|
) |
|
|
|
|
|
|
|
|
|
|
) |
|
|
|
|
|
March 14, 2007
|
|
Jeffrey R. Hinkle, Director
|
|
|
) |
|
|
|
|
|
|
|
|
|
|
) |
|
|
/s/ Jeffry B. Johnson |
|
|
March 14, 2007
|
|
Jeffry B. Johnson, Director,
Treasurer and Chief
Financial Officer
|
|
|
)
)
)
)
)
)
|
|
|
Jeffry B. Johnson, for himself and
as Attorney-in-Fact for the named
directors who together constitute
all of the members of the
Board of Directors
and for the named officers |
|
|
|
|
|
|
|
) |
|
|
|
|
|
March 14, 2007
|
|
Dennis P. Passantino, Director
|
|
|
) |
|
|
|
|
|
|
|
|
|
|
) |
|
|
|
|
|
March 14, 2007
|
|
Carl A. Bellini, Director
|
|
|
) |
|
|
|
|
|
|
|
|
|
|
) |
|
|
|
|
|
March 14, 2007
|
|
Dennis H. Field, Director
|
|
|
) |
|
|
|
|
|
|
|
|
|
|
) |
|
|
|
|
|
March 14, 2007
|
|
Gerald J. Laber, Director
|
|
|
) |
|
|
|
|
|
|
|
|
|
|
) |
|
|
|
|
|
March 14, 2007
|
|
Brian L. Boberick, Controller
|
|
|
) |
|
|
|
|
|
44
EXHIBIT
INDEX
| |
|
|
Exhibit
Number |
|
Document |
3.1
|
|
Restated Articles of Incorporation, as amended and restated through
May 1, 1996, incorporated by reference to Exhibit 3.1 of our Annual
Report on Form 10-K for the year ended December 31, 2001. |
|
|
|
3.2
|
|
Bylaws, as amended through February 27, 1996, incorporated by
reference to Exhibit 3.2 of our Annual Report on Form 10-K for the
year ended December 31, 2004. |
|
|
|
4.1
|
|
Change in Terms Agreement with Citywide Banks, dated June 28, 2006,
between us and Citywide Banks, incorporated by reference to Exhibit
10.1 of our Current Report on Form 8-K filed on June 30, 2006. |
|
|
|
4.2
|
|
Business Loan Agreement, dated June 28, 2006, between us and Citywide
Banks, incorporated by reference to Exhibit 10.2 of our Current
Report on Form 8-K filed on June 30, 2006. |
|
|
|
4.3
|
|
Addendum to Loan Documents, dated June 28, 2006, incorporated by
reference to Exhibit 10.3 of our Current Report on Form 8-K filed on
June 30, 2006. |
|
|
|
4.4
|
|
Promissory Note dated June 7, 2006 by us to Citywide Banks; Deed of
Trust dated June 7, 2006 among us, Citywide Banks and the Public
Trustee of the City and County of Denver, Colorado; Assignment of
Rents dated June 7, 2006 between us and Citywide Banks; letter
agreement dated June 7, 2006 regarding the change in the amount under
the existing bank line of credit with Citywide Banks, incorporated by
reference to Exhibit 10.0 of our Current Report on Form 8-K filed on
June 12, 2006. |
|
|
|
10.1*
|
|
Scott’s Liquid Gold-Inc. Health and Accident Plan, Plan Document and
Summary Plan Description Amended and Restated Effective October 1,
2003 incorporated by reference to Exhibit 10.1 of our Annual Report
on Form 10-K for the year ended December 31, 2004. |
|
|
|
10.2
|
|
Scott’s Liquid Gold & Affiliated Companies Employee Benefit Health
And Welfare Plan Amendment #1-2004 incorporated by reference to
Exhibit 10.2 of our Annual Report on Form 10-K for the year ended
December 31, 2004. |
|
|
|
10.3*
|
|
2007 Key Executive Bonus Plan. |
45
| |
|
|
Exhibit
Number |
|
Document |
10.4*
|
|
Indemnification Agreement dated May 6, 1987, between the
Registrant and Mark E. Goldstein, incorporated by reference
to Exhibit 10.4 of our Annual Report on Form 10-K for the
year ended December 31, 2002; Indemnification Agreement
dated December 23, 1991, between the Registrant and Dennis
H. Field, incorporated by reference to Exhibit 10.4 of our
Annual Report on Form 10-K for the year ended December 31,
2002; Amendment to Indemnification Agreement dated January
17, 1992, between the Registrant and Dennis H. Field,
incorporated by reference to Exhibit 10.4 of our Annual
Report on Form 10-K for the year ended December 31, 2002;
Indemnification Agreement, dated July 12, 2000, between us
and Jeffrey R. Hinkle, incorporated by reference to Exhibit
10.4 of our Annual Report on Form 10-K for the year ended
December 31, 2002; Indemnification Agreement, dated August
16, 2000, between us and Carl A. Bellini, incorporated by
reference to Exhibit 10.4 of our Annual Report on Form 10-K
for the year ended December 31, 2002; Indemnification
Agreement, dated November 2, 2000, between us and Jeffry B.
Johnson, incorporated by reference to Exhibit 10.4 of our
Annual Report on Form 10-K for the year ended December 31,
2002; Indemnification Agreement, dated November 20, 2002
between us and Dennis P. Passantino, incorporated by
reference to Exhibit 10.4 of our Annual Report on Form 10-K
for the year ended December 31, 2002; and, Indemnification
Agreement, dated January 26, 2004 between us and Gerald J.
Laber, incorporated by reference to Exhibit 10.4 of our
Annual Report on Form 10-K for the year ended
December 31, 2003. |
|
|
|
10.5
|
|
Agreement dated as of May 3, 2005 between Montagne Jeunesse
International Ltd. and Neoteric Cosmetics, Inc.,
incorporated by reference to Exhibit 10.2 of our Quarterly
Report on Form 10-Q for the quarter ended March 31, 2005. |
|
|
|
10.6*
|
|
Scott’s Liquid Gold-Inc. Employee Stock Ownership Plan and
Trust Agreement, Amended and Restated Effective January 1,
2001, incorporated by reference to Exhibit 10.6 of our
Annual Report on Form 10-K for the year ended December 31,
2001; and Second Amendment to Scott’s Liquid Gold-Inc.
Employee Stock Ownership Plan, effective as of January 1,
2003, incorporated by reference to Exhibit 10.6 of our
annual Report on Form 10-K for the year ended December 31,
2003. |
|
|
|
10.7
|
|
Third Amendment to Scott’s Liquid Gold-Inc. Employee Stock
Ownership Plan, effective March 28, 2005, incorporated by
reference to Exhibit 10.1 of our Quarterly Report on Form
10-Q for the quarter ended
March 31, 2005. |
|
|
|
10.8*
|
|
Scott’s Liquid Gold-Inc. 1993 Stock Option Plan for Outside
Directors, incorporated by reference to Exhibit 4.7 of our
Registration Statement No. 33-63254 on Form S-8, filed with
the Commission on May 25, 1993. |
|
|
|
10.9*
|
|
Scott’s Liquid Gold-Inc. 1998 Stock Option Plan,
incorporated by reference to Exhibit 4.3 of our
Registration Statement No. 333-51710, filed with the
Commission on December 12, 2000. |
|
|
|
10.10*
|
|
Scott’s Liquid Gold-Inc. 2005 Stock Incentive Plan,
incorporated by reference to Exhibit 4.3 of Registration
Statement No. 333-126028 filed with the Commission on June
22, 2005. |
46
| |
|
|
Exhibit
Number |
|
Document |
10.11
|
|
Product Development, Production and Marketing Agreement with Modec,
Inc. dated April 4, 2006, incorporated by reference to Exhibit 10.1 of
our Quarterly Report on Form 10-Q for the quarter ended June 30, 2006. |
|
|
|
10.12
|
|
Form of Lease for Keltec Dispensing Systems USA, Inc., incorporated by
reference to Exhibit 10.1 of our Quarterly Report on Form 10-Q for the
quarter ended March 31, 2006. |
|
|
|
10.13
|
|
Supply Agreement dated as of March 28, 2006 between us and Keltec
Dispensing Systems USA, Inc., incorporated by reference to Exhibit 10.2
of our Quarterly Report on Form 10-Q for the quarter ended
March 31, 2006.** |
|
|
|
10.14
|
|
Second Amendment to September 1, 2000 License Agreement between
Neoteric Cosmetics, Inc. and TriStrata Technology, Inc., incorporated
by reference to Exhibit 10.3 of our Quarterly Report on Form 10-Q for
the quarter ended March 31, 2006.** |
|
|
|
10.15
|
|
License Agreement dated as of September 1, 2000 between TriStrata
Technology, Inc. and Neoteric Cosmetics, Inc., , incorporated by
reference to Exhibit 10.4 of our Quarterly Report on Form 10-Q for the
quarter ended March 31, 2006.** |
|
|
|
21
|
|
List of Subsidiaries. |
|
|
|
23
|
|
Consent of Ehrhardt, Keefe, Steiner & Hottman PC. |
|
|
|
24
|
|
Powers of Attorney. |
|
|
|
31.1
|
|
Rule 13a-14(a) Certification of the Chief Executive Officer. |
|
|
|
31.2
|
|
Rule 13a-14(a) Certification of the Chief Financial Officer. |
|
|
|
32.1
|
|
Section 1350 Certification. |
|
|
|
| * |
|
Management contract or compensatory plan or arrangement |
| |
| ** |
|
This Agreement is currently subject to a Confidential Treatment Request with the Securities and
Exchange Commission. |
47